Advances in Mergers and Acquisitions, Volume 3 (Advances in Mergers and Acquisitions)

CONTENTS LIST OF CONTRIBUTORS vii INTRODUCTION Cary L. Cooper and Sydney Finkelstein ix MANAGEMENT APPROACHES TO ME...

Author: Cary L Cooper | Sydney Finkelstein

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CONTENTS LIST OF CONTRIBUTORS

vii

INTRODUCTION Cary L. Cooper and Sydney Finkelstein

ix

MANAGEMENT APPROACHES TO MERGER EVOKED CULTURAL CHANGE AND ACCULTURATION OUTCOMES Marie H. Kavanagh and Neal M. Ashkanasy

1

ACQUIRER RETURNS WHEN BUYING PUBLIC VERSUS PRIVATE FIRMS Laurence Capron and Jung-Chin Shen

35

THE MANAGING EXECUTIVE IN POST-ACQUISITION MANAGEMENT Duncan Angwin

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“IDEAL” ACQUISITION INTEGRATION APPROACHES IN RELATED ACQUISITIONS OF EQUALS: A TEST OF LONG-HELD BELIEFS Kimberly M. Ellis and Bruce T. Lamont

81

MANAGING HUMAN RESOURCES IN CROSS-BORDER ALLIANCES Randall S. Schuler, Ibraiz Tarique and Susan E. Jackson

103

A REPUTATIONAL PERSPECTIVE ON MERGERS Gary Davies and Rosa Chun

131

v

vi

DIMENSIONS OF MANAGEMENT STYLE COMPATIBILITY AND CROSS-BORDER ACQUISITION OUTCOME Richard Schoenberg

149

ACQUISITIONS AND INTANGIBLE RESOURCES: REPUTATIONS AS A MOBILE AND TRANSFERABLE ASSET Todd Saxton

177

MERGERS AND ACQUISITIONS AND CORPORATE GOVERNANCE Anant K. Sundaram

193

LIST OF CONTRIBUTORS Duncan Angwin

Warwick Business School, University of Warwick, UK

Neal M. Ashkanasy

UQ Business School, University of Queensland, Australia

Laurence Capron

INSEAD, France

Rosa Chun

Manchester Business School, UK

Gary Davies

Manchester Business School, UK

Kimberly M. Ellis

The Eli Broad Graduate School of Management, Michigan State University, USA

Susan E. Jackson

Rutgers University, USA

Marie H. Kavanagh

UQ Business School, University of Queensland, Australia

Bruce T. Lamont

Florida State University, USA

Todd Saxton

Indiana University Kelley School of Business, USA

Richard Schoenberg

Cranfield University School of Management, UK

Randall S. Schuler


Jung-Chin Shen

INSEAD, France

Anant K. Sundaram

Thunderbird, the American Graduate School of International Management, USA

Ibraiz Tarique


vii

INTRODUCTION

Mergers and acquisitions have been part of the business landscape for decades, yet the challenge of making M&As work continues to be a work-in-process. It is remarkable that managers, Boards, and academics are still grappling with this issue in 2004, given the increasing attention directed toward solving the M&A puzzle among people in all three groups. But it is this very difficulty in getting our hands around M&As that make the collection of articles in this book so very timely. In very broad terms there is probably an emerging consensus on what the critical problems are. Stated simply, M&As tend to fail because acquiring companies pay too much, they make mistaken assumptions about the strategic logic of the deal, and they ineffectively integrate the two companies after the acquisition is completed. Of these three themes, the compilation of articles here pay particular attention to the integration challenge. In many ways this is not surprising, since despite an increasing number of studies on acquisition integration, we are probably still at the earlier stages of understanding what goes on, and what should go on. The chapter by Ellis and Lamont examines several important process dimensions of integration, including timing, procedural justice, target involvement in decision-making, preliminary planning, and transition management. What’s particularly interesting about this article is the authors juxtaposition of these process dimensions against Haspeslagh and Jemison’s (1991) classic integration approaches, which allowed these authors to speak to the question of effective management across the different forms of integration. A major theme in several of the articles is organizational change. This makes perfect sense because the acquisition integration process is really a process of organizational change, with one additional complication – rather than one organization shifting focus, two are involved. It is for this reason that some of the lessons that have come out of the organizational change literature may be relevant in the merger arena as well. For example, Kavanagh and Ashkanasy, who study mergers in three large public universities in Australia, point out how the integration managers they followed were handicapped by their lack of change management skills. The result was a series of negative perceptions among people who needed to coordinate and cooperate for those mergers to succeed. As they note, it is hardly possible for individuals to enthusiastically embrace the “new organization” when the process of change leaves them dissatisfied and even angry! ix

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INTRODUCTION

The change theme also played out in the article by Schuler, Tarique, and Jackson. These authors focused on the role of human resource management to help cope with change during the integration of cross-border alliances, which they define to include mergers and acquisitions as well as strategic partnerships. Central to their argument is the notion that human resource management policies must be carefully matched to the companies engaged in cross-border alliances. They point out how learning and knowledge sharing are fundamental challenges in cross-border alliances, and identify the critical training and development opportunities at several key stages of M&As and international joint ventures. Two chapters examine the central role of management in the acquisition process. Angwin pays particular attention to the “Managing Executive,” or senior executives that are often the architects of major strategic initiatives such as M&As. In an important insight, Angwin discusses how the background of the Managing Executive – both in terms of the inside/outside dimension and social capital – affects the degree of change following acquisition. Schoenberg looks at the related topic of management styles, and develops a set of hypotheses on how differences in such style attributes as risk orientation, formality, and participation in decisionmaking negatively affect performance in cross-border acquisitions. Further, conflicting management styles are expected to be a more serious problem when the integration process is characterized by intensive interaction and relatively few executive departures. Surprisingly, only differences in risk orientation turn out to be harmful; results for interaction terms for integration characteristics were mixed. Two articles tackle an issue that is receiving more and more attention in the literature, the question of reputation. However, the approaches to reputation are very different. Davies and Chun use reputation as an indicator of the perceptions of individuals in the two merging organizations to make the point that managers need to consider the emotional nature of the M&A process. They rightly point out that strictly rational perspectives can go awry and that integration managers need to be alert and responsive to the different ways in which emotional perceptions of integration are experienced. The paper that deals with reputation takes as its springboard the resource based view of the firm to argue that reputation is a type of intangible asset that can be highly valued in acquisitions. Here, Saxton identifies two attributes of reputation – transferability and mobility – that affect whether acquiring companies will capture the value inherent in buying a high-reputation target without having to pay a higher premium that negates the value gain. By arraying transferability and mobility into a 2 × 2, Saxton is also able to suggest alternative integration approaches in a novel way. The chapter by Capron and Shen also relies on the resource based view for theory development, but goes in a different direction than Saxton by comparing the value creation and value capture opportunities for public and private targets. They

Introduction

xi

argue that opportunities to control agency costs and share intangible resources are limited in private targets relative to public ones, reducing value creation. At the same time, they argue that value capture potential is greater for private targets because of their diminished bargaining power and asset liquidity. Finally, the chapter by Sundaram marshals data on M&A announcement effects, in the process providing data to test some of Capron and Shen. Sundaram finds in a very robust sample of recent acquisitions that acquirer returns are actually positive and significant in acquisitions of non-public targets, which may well be due to the value capture logic of Capron and Shen. Sundaram goes on to examine the corporate governance implications of his data and results, an interesting extension that brings us back to why this collection of articles is both timely and important. Mergers and acquisitions continue to be a major feature of global business, and the more we understand what works and what doesn’t, the stronger our prescriptions for managers. The articles in this volume, by providing a multi-disciplinary and broad set of ideas for researchers and managers alike, is another step in this direction. Cary L. Cooper and Sydney Finkelstein Editors

MANAGEMENT APPROACHES TO MERGER EVOKED CULTURAL CHANGE AND ACCULTURATION OUTCOMES Marie H. Kavanagh and Neal M. Ashkanasy ABSTRACT In a study of merger-evoked cultural change in three organizations, quantitative and qualitative data were collected from individuals at all employment levels in both merger partners within each organization. Results were that most individuals perceived that the merger had impacted significantly on them personally. There was, however, a perceived lack of congruence between the organizational cultures of merging partners, resulting in culture clashes and significant changes to the organizations’ organizational cultures. More specifically, outcomes for both individuals and the subsequent acculturation following the mergers were related to the approach adopted to manage the merger process: incremental, immediate, or indifferent.

INTRODUCTION In this post-modern era, organizations have to deal with as much chaos as order, and change is a constant dynamic (Berquist, 1993). Much of this change has resulted from mergers or acquisitions, which have been an ongoing part of the Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 1–33 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03001-7

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MARIE H. KAVANAGH AND NEAL M. ASHKANASY

operational strategy of many organizations for years as a significant and popular means for achieving corporate diversity, growth and rationalisation (Cartwright & Cooper, 1992; Weber, 2000). The time scale may be as short as 12 months or as long as five or more years, and merging partners may often function as separate business entities for some time before there is any physical or cultural integration (Walter, 1985). Mergers have the propensity, however, to have a significant impact on both individuals and organizational cultures and may result in high costs, both personal and financial. The outcomes of merger events for individuals who participate and the culture of the organizations involved, often reflect the manner in which the organizational change process is planned and managed. This study is an exploratory investigation of perceptions of academic organizational members involved in merger-evoked change in tertiary institutions in the Australian higher education sector during the post merger and integration phase. The changes within the sector provided an environment where great tension, a large amount of soul-searching, and a significant potential for identity crises occurred as a result of the transition of colleges of advanced education to universities (Millet, 1996). The process resulted in a great deal of organizational restructuring involving substantial power plays, cultural clashes and personnel upheaval and uncertainty (Cook, 1990; Harman, 1989; Harman & Meek, 1988a, b; Whiteley, 1995) and prompted a rich setting of significant strategic change at organizational level with subsequent changes for individuals. In summary, the general aims of the research were to expand current literature on mergers by: investigating the impact that individuals and organizational culture have on how a merger is managed; highlighting the effect of a merger on outcomes for individuals and their values and organizational culture, by relating different change management strategies to acculturation methods which evolve; integrating and applying both quantitative and qualitative methods of investigation to assess individual values and organizational culture (Jick, 1979).

THEORETICAL BACKGROUND AND RESEARCH QUESTIONS In this study, mergers and organizational change are examined in terms of the impact at both the micro (individual) level and the macro (organizational) level. Graves (1981) emphasized that successful organizational outcomes are linked to successful individual outcomes. Whiteley (1995) also highlighted the need to take

Merger Evoked Cultural Change and Acculturation Outcomes

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into account what it was that employees value (i.e. individual values), rather than inferring what employees should value in any merger situation. Human factors are of pivotal importance in particular in merger situations and, by making allowance for these in the manner in which the merger is managed, a less stressful and more effective change process can be achieved (Ashford, 1988; Ashkanasy & Holmes, 1995; Ivancevich, Schweiger & Power, 1987). In this respect, an important outcome of the present study was to reinforce the view that the human side is critical to successful management of the merger process. Davy et al. (1988) suggested that the only thing certain about organizational change “is that nothing is certain” (p. 58). In many cases, mergers are being used as a vehicle to achieve an appropriate cultural mix and eventually a new culture through acculturation. Processes that involve mutual influence of two previously autonomous systems and first hand contact between members of the two groups, have been studied under the topic of acculturation (Berry, 1980), where “acculturation” was described as “changes induced in (two cultural) systems as a result of the diffusion of cultural elements in both directions” (p. 215). The concept of acculturation focuses on the desires of the members of the cultures being merged and the way in which members adapt to the merger. During mergers and acquisitions, acculturation involves changes that occur as a result of contact between individuals of differing cultural origins resulting in diffusion of cultural elements in both directions (Berry, 1980; Nahavandi & Malekzadeh, 1988; Schnapper, 1992). Schein (1992, p. 5) suggests that culture helps us to understand the “hidden and complex aspects or organizational life.” Authors such as Mirvis and Marks (1985) explored the impact of a lack of shared reality or cultural differences between merging partners on the success of mergers, and emphasised the inhibiting influence of such factors on the merger. Pritchett (1985) suggested that, in a merger situation, the difference in corporate culture can be dramatic, even when organizations operate in the same industry. As such, mergers provide the opportunity to study culture at a time when it is potentially threatened and therefore assumes salience in people’s minds Cartwright (1995). Hall and Norburn (1989) extended the debate on the importance of cultural fit by proposing that the success of the new organization will be directly correlated with the extent of cultural fit between the two merging partners. They concurred with researchers such as Hayes (1979), Chatterjee, Lubatkin, Schweiger and Weber (1992), Hall and Norburn (1989), and Nahavandi and Malekzadeh (1988), who applied the culture concept to studies of mergers and have generally established that compatibility of cultures is critical to merger success, particularly if the strategy is to include the close integration of activities and management. When two cultures merge, the degree of cultural congruence or homogeneity that exists will affect

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how individuals draw on similarities to form relationships and collaborate (Earley & Mosakowski, 2000). Cartwright and Cooper (1996) also suggest that success in a merger depends on identifying partners who represent both a good strategic and cultural match. It would appear therefore that an understanding of the strength and operation of the organizational culture of each of the merging partners is central to achieving an effective merger process in any organization. Mergers can result in cultural integration and the creation of a new and different culture (Graves, 1981). Schneider (1987) argues that individuals and organizations with similar values and cultures will attract each other and over the long run, will reflect the values held by their members and culture will adapt accordingly. The process of acculturation, which follows the merger, should be guided by the degree of congruence that exists between the cultures of the merging partners prior to the merger taking place (Nahavandi & Malekzadeh, 1988). Organizational cultures are neither uniform nor static. They evolve over time and it seems reasonable to posit that all cultural systems will exhibit continuous, incremental changes punctuated on occasion by more episodic, radical change (Watzlawick et al., 1974; Weick & Quinn, 1999). How change occurs within organizations is affected by the fact that cultures are underpinned by deep assumptions that are patterned and shared (Schein, 1995). This often results in persistence becoming the norm rather than swift or radical change. Goffee and Jones (2001) suggest that cultural change may often occur as subtle shifts within, rather than between, elements that characterise a particular culture. Martin (2002) has also argued that how a merger is perceived will depend at what stage the merger is at in terms of implementation. When cultural change occurs, employees become aware that the measuring tools for performance and loyalty have changed suddenly. This threat to old corporate values and organizational lifestyles leaves staff in a state of defensiveness accentuated by low levels of trust within the institution and cultural shock. Mirvis (1985) suggested that employee reactions pass through four stages: (i) disbelief and denial; (ii) anger, then rage and resentment; (iii) emotional bargaining beginning in anger and ending in depression, and finally; and (iv) acceptance. Unless these different stages are recognised and dealt with astutely, employees will resent change, will have difficulty reaching the acceptance stage, and the risk of merger failure is increased significantly. Reger et al. (1994) focused on cognitive self-concept theories to address resistance to seemingly advantageous changes. Schein (1985) also highlighted the role of the leader in creating and managing organizational culture and suggested that, when a culture becomes dysfunctional as a result of change, it is the leader who must act to assist the group to unlearn


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some of its cultural assumptions and to learn alternative assumptions. Trice and Beyer (1993) used strain between competing ideologies and the actions of different types of leaders to describe how organizational cultures originate and change. Weber and his colleagues (see Weber, 1989; Weber & Schweiger, 1993; Weber, Schweiger & Lubatkin, 1992) examined top management teams within merging organizations and looked at the interrelationships between cultural differences, levels of integration and coordination, inter-group tension, employee attitude, commitment and cooperation. This research found that, when cultural differences between the top management teams as perceived by the non-dominant partner exist, greater human resource problems will be experienced in managing the merger. Managers will need to be skilled in relinquishing and helping others relinquish past values which are not in tune with the current, shared vision of future organizational arrangements (Whiteley, 1995). In any merger the integration or change strategy must be planned. That strategy determines the extent to which the various systems of the two firms will be combined and the degree to which the employees of the organizations will interface (Shrivastava, 1986). Buono, Bowditch and Lewis (1985) suggest that mergers often lead to the cultural displacement of the smaller or less powerful partner or acquired organization. Consideration of the human factors involved should guide the implementation of any change process. Pondy and Huff (1988) and Albert (1992) argue that “framing” strategies affect cognitive acceptance of organizational change. Reger, Gustafson, Demarie and Mullane (1994) suggest that programs presented as radical departures from an organization’s past fail because the cognitive structures of members, constrain their understanding and support of the new initiatives. In essence, culture change refers to substantial kinds of changes that are planned and more encompassing compared to those changes that arise spontaneously within cultures or as part of conscious efforts to keep and existing culture vital (Trice & Beyer, 1993). Meyerson and Martin (1987) suggested that any change process must be viewed in terms of different organizational cultures. Martin (1992, 2002) advocates a three-perspective view of organizational culture (integrated, differentiated and fragmented), suggesting that all three views might exist in an organization at the same time with consequent implications for any change process and acculturation in the post merger phase. Based on the works of Nahavandi and Malekzadeh (1988) and Reger et al. (1994), the present study is based on the idea that successful implementation of fundamental organizational transformation relies upon assessing the cultural congruence between organizations and selecting an appropriate method of acculturation to reframe and manage the change over time. Further, the degree of congruence between the organizational cultures of the merging organizations

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will impact upon the method of acculturation, which occurs as part of the change process (Nahavandi & Malekzadeh, 1988; Reger et al., 1994). In particular, our research was designed to examine the interplay between shifts in organizational culture and the method of acculturation adopted to effect the merger process and the findings contribute to an understanding of mergers in most settings. This was to enable a better understanding of the factors that emerge as outcomes for individuals and the organizational culture of institutions involved in a merger process. In this respect, the acculturation model proposed by Nahavandi and Malekzadeh (1988) provides a framework for understanding the cultural dynamics of mergers. It is also useful for explaining the nature of the outcomes for individuals who are part of the new organization. According to this model, there are four possible modes of acculturation: assimilation, integration, separation, and deculturation. Assimilation is a unilateral process. Members of one group are willing to relinquish their culture as well as most of their organizational practices and systems. Following the merger, structural as well as cultural and behavioral assimilation will occur and one partner will cease to exist as a cultural entity. Integration involves interaction and adaptation between the cultures of the merging partners and requires mutual contributions by both groups. It does not involve loss of cultural identity by either group. This method leads to a degree of change in both groups’ culture and practices with a flow of cultural elements between both. Separation occurs when members of both cultures wish to preserve their culture and organizational system and resist any attempt to become assimilated with each other in any way or at any level. This means there will be minimal cultural exchange between the two groups, and each will function independently. Deculturation occurs when members of one merging organization do not value their own culture and organizational practices and systems, and do not want to be assimilated into the other organization. Deculturation involves losing cultural and psychological contact with both one’s group and the other group and involves remaining an outcast to both. Cartwright and Cooper (1996) report that unsatisfactory acculturation following a merger can have an adverse impact on organizational and human outcomes. They further suggest that, in making an assessment of the culture of the merging partner, individuals take into account two factors: first, the extent to which they value their existing culture and wish to preserve it, and second, the extent to which individuals perceive the culture of the merging partner to be desirable enough to induce a move in culture. Since the objective of the present study was to learn and to explore, rather than to test hypotheses rigorously, seven research questions were investigated. These


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questions were centred on the fact that mergers represent a major organizational event to employees and organizations because they threaten and disturb organizational cultures and often force the integration of people who do not share the same reality Cartwright (1994, 1996). RQ1. To what extent did individuals within the institutions perceive that the merger produced changes within the institution that affected them personally? RQ2. What factors affected the ability of individuals and those around them to cope with and to accept the changes that occurred? RQ3. Were there perceived differences between the cultures of the merging institutions prior to the merger? RQ4. Did individuals perceive that there had been visible changes to the organization in terms of its culture, or mission as a result of the merger? RQ5. What was the nature of the influence that leaders had on the merger process, if any? RQ6. Did individuals perceive that the merger or change process had been managed well? RQ7. What method of acculturation did the individual perceive had taken place?

METHOD Setting and Sample The studies we report were conducted in three large public universities situated in metropolitan cities in Australia. All three were selected because of their locational similarities, number of merging partners involved, and the fundamental differences which existed between them in terms of size, number of EFTSUs (Effective Full Time Student Units),1 orientation, length of existence, organizational philosophy and structure, and the manner in which each institution approached the merger/change process.2 Because of the merger process, multi-campuses were involved at each of the three institutions and participants from all campuses of each institution were included in the study. In all three institutions the merger involved a larger (major) university campus and several smaller (minor) CAE3 campuses. Details of the sample are presented in Table 1.

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Table 1. Data Collection Profile for Institutions and Participants. Institution

Number of sites Major partner size (EFTSU’s) Minor partner size (EFTSU’s) Number of study participants Major partner Minor partner Male Female Average length of employment (years)

One

Two

Three

3 >20,000 >2,000 22 12 10 15 7 17.3

3 >12,000 1–2,000 20 6 14 13 7 17.7

5 >6,000 1–2,000 18 7 11 10 8 14.1

Note: Effective Full-time Student Unit (fulltime student = 1; part-time student = 0.5).

Procedure Qualitative and quantitative methods were used to provide answers to the research questions. As such this study is an example of triangulated methodology (Jick, 1979). Firestone and Herriott (1983) have alluded to the need for qualitative researchers to use multi-site, multi-case designs, often with multiple methods. This improves generalisability and provides reassurance that the events and processes in one setting are not idiosyncratic. Face-to-face interviews which provide the interviewer with an opportunity assess body language and facilitate discussion on sensitive issues were conducted to generate facts, opinions, and insights (Yin, 1984), and give a more complete picture of participants’ experiences of the merger process. Sixty interviews were conducted with individuals chosen randomly from each of the three institutions involved. They were scheduled in locations convenient to the interviewee, with only the participant and the interviewer present. As demonstrated by LorenziCioldi (1991) the aspects of the situation can impact on how a person describes events affecting him/herself so a comforable environment was important. All interviewees were promised anonymity Burgher (1980), informed that neither individuals nor organizations would be identified in any reporting of the research, and that individuals should present responses from their own point of view. The semi-structured interview technique (Minichiello et al., 1995) was used. An interview script involving the same open-ended questions was employed for all interviews. The central issue was to discover what academics in each of the three institutions believed to be the effect of the merger process on themselves as individuals, the culture of the organization, and the extent of change, the manner


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in which the change was managed, and the methods of acculturation that evolved. Where relevant, responses were further supported through documentation or observation by the interviewer concerning emotions and body language during the interview. All interviews were taped, coded to preserve the identity of the participant, and transcribed in full (Tracy, 1997). Results of interviews revealed that the three institutions had adopted different approaches to the process of merging. This led to differences in the outcomes that unfolded during our study.

Data Coding In order to highlight the depth of feeling about each of the research questions, responses were quantified. By classifying and summarizing responses into set categories or codes, words are condensed but care must be taken to ensure the true meaning of responses is not lost. In the present study, to guard against value judgments influencing reliability of data (Marshall & Rossman, 1999), analysis and extraction of salient points, threads, and comments was undertaken by three raters or investigators. Each investigator independently analyzed all 60 transcripts and coded the responses. A coding system to apply to each response was devised on a scale of 1–5, e.g. 1 = no change to 5 = very significant change. An intra class correlation test was conducted on each question to determine the extent of absolute agreement between the three raters. Scores on these ranged from 0.91 to 1.0 indicating that a high level of agreement between raters concerning the ratings assigned to responses to each question. Disagreements were resolved by further review of the transcripts by the three raters. This method of investigator triangulation ensured reliability in terms of data analysis. Once ratings were assigned, a mean score for each of the questions for each respondent was calculated and these scores were then used to produce descriptive statistics for all the questions involved. Overall mean scores for each question were calculated and these are discussed in the following section. Mean scores for each question for each institution and for both major and minor partners within each institution and overall were calculated. A two-way between groups ANOVA (Table 2) was produced for all questions (except Research Question 7) to determine whether:4 (a) the institution influenced the response to the question; (b) the type of partner (minor/major) influenced the response; (c) there was an interaction of both institution and type of partner influencing the response.

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Table 2. Summary of ANOVA Statistics for Research Questions. Question

Source

Means Institution (A) 1

2

3

1 (a). To what extent did individuals in the institutions perceive that the merger produced changes? (Note: 1 = No change, 5 = Very significant change)

A B A×B Minor Major

2.52 3.93 3.06

1 (b). Was the institution affected by the merger and to what degree? (Note: 1 = No change, 5 = Very significant change)


3.48 4.0

2. What factors affected the ability of individuals and those around them to cope with/accept the changes which occurred? (Note: 1 = Very strong resistance, 5 = Accepts change with enthusiasm)


3.44 3.68 4.09

3. Were there perceived differences between the cultures of the merging institutions prior to the merger? (Note: 1 = No difference, 5 = Very significant difference)


4.09 3.93 4.35

4 (a). Did individuals perceive visible changes to the culture of the organization as a result of the merger? (Note: 1 = No difference, 5 = Very significant difference)


3.89 4.07 4.06

All 3

F Organizational Type (B) Minor

Major

3.17

3.97* 0.24 1.99

3.20

3.14

4.06

3.58

3.83

3.56

1.46 0.5 0.51

4.17

4.03

1.38 0.49 1.15

4.13

3.81

0.22 2.68 0.51

1.96 3.98 3.32 2.97 3.83 2.81

4.17

3.86

4.17* 4.03*

3.73 4.06 4.46 3.24 3.98 3.74 3.72

3.63 3.62 4.27 3.28 3.83 3.81

4.12

4.37 3.95 4.27 3.75 3.89 4.48

4.17 4.14 4.09 3.67 3.89 4.00

4.00


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Table 2. (Continued ) Question

Source

Means Institution (A) 1

2

3

4 (b). Did individuals perceive visible changes to the direction or mission of the organization as a result of the merger? (Note: 1 = Much Worse, 5 = Much better)


2.25 3.21 3.04

5. What influence on the merger process have leaders had, if any? (Note: 1 = Very negative influence, 5 = Very Positive Influence)


2.3

6. Did individuals perceive that the merger or change process had been managed well? (Note: 1 = Very badly managed, 5 = Very well managed)


1.80 2.68 2.87

∗p

F Organizational Type (B)

All 3

Minor

Major

3.01

2.52

3.81* 1.67 1.77

2.5

2.82

2.39 1.75 3.29*

2.51

2.28

7.38** 0.06 1.93

2.83

2.17 3.26 3.46 2.33 3.07 2.38

2.83 2.82

2.63

1.83 2.54 3.1 2.73 3.44 2.43 2.41

1.80 2.52 3.15 1.81 3.06 2.43

< 0.05. < 0.01.

∗∗ p

RESULTS Results are presented here in terms of the perceptions of participants. Points made have been supported by extracts from the literature and intertwined to tell the story. Actual quotes have been included to illustrate and reinforce sentiment, convey depth of feeling and, enrich understanding of the processes involved. RQ1. To what extent did individuals within the institutions perceive that the merger produced changes within the institution that affected them personally. Results for a two-way between groups ANOVA (Table 2), indicate that there was a significant relationship between the extent of the effect of changes on individuals and the institution involved. Reference to the mean scores in Table 2 indicates

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that individuals in Institution 2 reported that they experienced the greatest effect as result of the changes. The extent of the effect for individuals in Institutions 3 and 1 was less. There was no main effect overall for organizational type, i.e. no significant difference between the extent of the effect felt by individuals in major campuses compared to minor campuses. There was, however, some difference between the effect for individuals in minor and major campuses for Institution 1. Responses varied about the degree of change experienced by individuals, usually according to the status of the individual and extent to which the individual was involved in decision making about the change process. For example 35% of participants experienced very little or no change, “little change . . . I’m so far down the bottom of the heap it doesn’t really affect me too much.” But 53% of participants suggested that change had been significant, “Significant change emotionally . . . loss of identity and lived through a lot of non-sense from it,” and “Very significant change . . . was involved in planning merger of courses between institutions . . . when expressed concerns about content standard was subjected to strong pressure . . . has accepted redundancy package.” Individuals seemed to move from shock (Gill & Foulder, 1978) where members become aware of threats or changes to existing structures and a state of disorganization and confusion emerges, “Very significant change – major shock! . . . moved from almost rural campus to chaotic environment . . . pressure to do research.” Through adaptation, individuals begin to face the reality of the new situation and the likely need to forego existing practices, structures and comfort zones whether they feel comfortable about it or not; “Yes very significant changes personally . . . insecure about ability to ‘fit in’ . . . pressure affects family life, relationships suffer . . . institutions dramatically affected . . . change of emphasis from strong teaching base to research base . . . felt the institution had sold its soul.” The final stage involves change, in that individuals begin to address problems inherent in the new environment and circumstances in which they find themselves, and seek appropriate solutions with which they can work, “Significant change . . . had to move location . . . felt that skills were valued less at new institution but is now surviving.” While the extent of the effect on each individual varied, it was evident that 65% of participants had experienced destabilization that resulted in change, and were at different stages in terms of coping with the process. There was also a perception that the institution as a whole had changed substantially. Results for the ANOVA (Table 2), indicate a significant relationship between the extent of the effect of changes on institutions involved. Reference to the mean scores, indicates that Institutions 2 and 3 experienced greater changes than did Institution 1. There was also a main effect overall for organizational type with minor campuses


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experiencing more changes than major campuses. The Institutions in which this occurred were Institutions 1 and 3. Overall there was general agreement about the extent of change to the institution, with 87% of participants suggesting that change had been significant. It would appear that individuals from minor partners or smaller institutions consistently reported major changes, a greater degree of constraint by the major partner (Cartwright & Cooper, 1993), and a much greater challenge to existing norms and beliefs. The issues ranged from social effects, “Significant change . . . institution has grown enormously lack of cohesion . . . more impersonal atmosphere . . . less social interaction with students”; to work processes and practices, “More emphasis on research and working in teams . . . less time available for students . . . staff having to work harder . . . university bureaucracy very slow and unwieldy”; and administrative matters, “Very significant change . . . a lot of stress and a lot of blood on the floor . . . whole raft of budgetary and other management structure type issues that have gone on, that have weakened this campus’s position to split on its own . . . bureaucracy more unwieldy.” Roney and Cooper (1997) support these statements by reporting that increased workloads and limited resources can mean overwork for employees which in turn will impact on organizational effectiveness and success. Some organizations are characterized by a general altruistic regard for the wellbeing of the collective, while others are characterized by an opportunistic regard for individual advantage (Kilduff & Corley, 2000). It would appear that many individuals felt that there had been a movement away from collective wellbeing, “Very significant difference. Gone from small close-knit teaching institution to large impersonal university with main emphasis on research.” In addition, Cartwright and Cooper (1996) suggest that, when a feeling of simply “being acquired” exists, this is construed as a symbol of failure with consequent effects at the individual level and the organizational level. Less than 10% of respondents reported little or no change to the institution as a whole. These were usually individuals in the major partner, “Little change . . . I am part of the stronger institution and was already involved in research; the mouse will have to come to the elephant and not the other way round.” In addition, some individuals in the major partners, which typically were universities as opposed to CAEs pre-merger, felt unhappy with the consequences they perceived as a result of the merger, “People with fewer academic qualifications paid the same as staff who had studied and researched for years to get to the academic level they were . . .. Academic standards falling due to shift in emphasis.” In summary, most individuals, particularly those in smaller peripheral merging CAEs, noted a significant degree of change to many of the everyday operational practices, structures and environment of their institution.

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RQ2. What factors affected the ability of individuals and those around them to cope with and to accept the changes that occurred? Results in Table 2 indicate that there was no main effect for institution or organizational type (major or minor partner), where individual perceptions about acceptance of the changes are concerned. The response from 60% of participants was to “accept change as inevitable” with a further 17% “accepting change with enthusiasm.” There were, however, some 20% of respondents who were still resisting any change. There have been several studies that have examined individual adjustment to change (Terry, Callan & Sartori, 1996), and Lazarus and Folkman’s (1984) theory of stress and coping. Martin, Jones and Callan (1999) found support for a model that included measures of organizational climate as well as measures of individual appraisal of change and individual differences (e.g. negative effect). In this respect, and as Lazarus and Folkman (1984) note, situational appraisals reflect the individual’s cognitive evaluation regarding how a situation or event will affect his or her level of wellbeing, “Opinions vary. I think it depends on whether individuals gained some advantage or not. Some individuals have experienced less negative effects and are more accepting. Those most affected no longer care, are simply trying to survive.” Bolman and Deal (1991) comment that resistance to change can stem from fears of being unable to perform under new work arrangements, “Accepts change reluctantly. I have had to accept things in order to keep my job. That doesn’t mean I agree with the changes. I just keep my head down, hope I won’t be noticed, and do the best job I can.” In addition, ongoing training and support can provide opportunities for employees to question rationales (and receive answers), check reality, express fears or frustrations, obtain support from peers and maintain motivation. If this is not done disillusionment may result, “Accepts change, was initially enthusiastic, but now feels pressures are phenomenal . . .. Describes personal philosophy as ‘progressive disengagement.’ . . . Less interest in being involved in the process.” Sathe (1985) suggests, that the greater the strength of the culture and the larger the magnitude of the proposed change, the greater the resistance to change. In the present study, it would also appear that the length of association with the institution and the age of the respondent affected their reaction, “Older staff accept change very reluctantly. Younger staff don’t have a clue what they lost anyway.” Inducing people to work and accept new ways may involve overcoming past habits, values, beliefs, and identity (Michela & Burke, 2000), “Accepts [change] as inevitable. You can’t fight them . . . just trying to cope. I think new system


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encourages a ‘personal philosophy’ and don’t try to think about the good of the whole, its every man for himself jack. I find this attitude difficult to adjust to.” A climate of positive feeling toward the employer is necessary if employees are to change their ways of working as required, “Accepted change as inevitable but is now enthusiastic. It must be like falling in love with your jailer – there are some really rough times – but we love it.” According to Beer (1987) intrinsic motivation for change is generated through cultivation of dissatisfaction with the status quo. In order to reduce the forces in favour of the status quo (Lewin, 1951), it is first necessary to persuade people of the need for change by convincing them that the current way of doing things is not working, “Accepts change enthusiastically . . . I see it as a challenge and an opportunity for the most part rather than hang on to notions of the past.” Both intrinsic and extrinsic motivators may be employed to foster change and overcome resistance. Harrison (1995) asserts that intrinsic motivators are superior to extrinsic ones, because the latter tend to produce “surface compliance and covert rebellion” (p. 159). In the present study, because of the shift in emphasis from teaching to research as a result of the mergers, those respondents who enjoyed research accepted the change more readily, “Yes, accepts change enthusiastically . . . has university background and fits in to new system,” but those who did not were apprehensive, “Accepts change reluctantly ‘I have been somewhere between . . . an active opponent and an unwilling, reluctant bride.’ ” Acceptance of change by individuals also reflected the manner in which the change was managed in each institution. Sathe and Davidson (2000) suggest that evidence clearly supports the fact that culture change consists of changing people’s minds as well as their behavior. The manner in which the culture change for each individual is evoked, also has a significant impact on the result and the consequences for each individual, “Accepts change unwillingly. I certainly have been stressed for a while, I was taking valium to sleep . . .. Most of my anxieties are about the unfairness of the process. I have become more enthusiastic since moving to a new area.” Vollman (1996) describes two large organizations that implemented a top-down organizational change strategy. One mandated the implementation of a large number of detailed change intitiatives. The other communicated potential problems the organization was facing, mandated a general approach, but left it up to individual units to decide what changes to implement. The latter resulted in the successful development of a culture of urgency, whereas the former gave rise to “fear, resignation, (and) sham compliance” (p. 237). For example, “Accepts idea of change enthusiastically. But does not like the particular changes or the way

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they have been handled. I like change. The only thing is that you have to be given the opportunity to take part in those changes,” but, “opted out of the process. I just one day dropped the whole bundle and said here, someone else can take this ball and run with it, because I’m not.” In summary, during times of change, it is important that the organization create an atmosphere of psychological safety for engaging in the new behaviors and testing the waters of the new culture. This encourages employees to be involved and to verify for themselves the validity of the new beliefs and values and to explore how they personally can contribute to the change effort (Zammuto, Gifford & Goodman, 2000). At the end of the day, “Most people are cynical about change but resigned to it and . . . just glad to survive.” Some are even enthusiastic, “Embraces change as a challenge, as a vehicle for new opportunities in personal advancements in teaching and technology . . . ‘Not nostalgic about the past’ . . . [views himself] as a person of the new millennium.” RQ3. Were there perceived differences between the cultures of the merging institutions prior to the merger? Results in Table 2 indicate that there was no main effect for institution or organizational type (major or minor partner), where perceptions about differences between the cultures of the merging institutions were concerned. Eighty-nine percent of participants from all three institutions, regardless of whether they were from a major or minor campus, suggested that there were significant differences between the cultures of the merging institutions prior to the merger. Burke (1994) emphasizes that culture influences people’s orientations to one another, to work, and to the environment. Nahavandi and Malekzadeh (1988) have studied mergers from an organizational culture perspective and have established that successful outcomes require cultural compatibility or similarity. When there is an evident lack of similarity, “Very significant differences . . . we came from a culture where people seemed to matter, to one which is very much centered around getting the tasks done and often in isolation,” the culture of one institution will dominate, “Totally different cultures . . . both were worthwhile and contributing to the community . . . one should not have been superimposed over the other as one has been lost.” Weber (2000) suggested that such culture clashes in mergers have major implications for stress, attitudes, behavior and turnover, especially for the employees of “acquired” organizations. In the words of one interviewee, “Significant differences [existed] amongst a number of merging institutions: some with totally different philosophies and different emphasis, [and in each case], the stronger partner has prevailed, like the boa constrictor who squeezes the life out of its smaller prey.” It was evident that most respondents, regardless of their sentiments


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about the outcome of the merger, felt that there were significant differences between the cultures of the parties required to merge. RQ4. Did individuals perceive that there had been visible changes to the organization in terms of its culture, or mission as a result of the merger?

Culture Results in Table 2 indicate that there was no main effect for either institution or organizational type in terms of the extent of the perceived difference in organizational culture caused by the merger. Ninety-two percent of participants thought that the culture of the organization was significantly different as a result of the merger. Schein (1992) asserts that organizational cultures continually change because of changes in the environment, critical incidents, structural changes, membership changes, and internal leadership. Gagliardi (1986) contrasts incremental change to revolutionary change. In the present study, many perceived that revolutionary change had occurred, continuity had been lost, and a new culture, having a completely new identity, had been created, “Very significant change . . . has lost touch with previous culture, new one imposed. The sense of community is lost; people feel swallowed up and isolated. It’s like a disaster . . . you are happy to survive but don’t know how you are going to continue to survive.” Reger et al. (1994) discuss several approaches to, and examples of, the use of identity to gain leverage for behavioral and cultural change. In the present study, many respondents grappled with expressing their feelings about a culture lost (Michela & Burke, 2000) and individuals often reported a very keen sense of loss of identity which led to cultural change, “Well there is no institution anymore is there? So there is no culture” and, “Very significant change . . . [original] college culture has just submerged and disappeared.” In the present study, there does not appear to have been great attention paid to cultural similarity when choosing merger partners, prior to the merger. Merger partners were chosen, instead, on the basis of geographical location. Many individuals in the minor institutions experienced significant changes with regard to new expectations and new work roles, with little time or training to adapt, “Very significant change . . . university is much larger and more impersonal . . . whole new culture.” In summary, it was evident that most respondents, regardless of their sentiments about the outcome of the merger, felt that there were significant changes to the cultures of the parties required to merge.

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Mission Results in Table 2 indicate that there was no main effect for organizational type (major or minor partner), but there was a significant relationship between the effect of changes to the mission and the institutions involved. Reference to the mean scores indicates that while there was little difference for Institutions 2 and 3, individuals in Institution 1 appeared to have more negative impressions of the change in direction for the mission of their institution. Trompenaars (1993) emphasized the importance of the general views of employees about the organization’s destiny, purpose and goals in determining organizational culture. On this question, opinions were divided with about one-third of respondents indicating a negative move in direction for the mission of the organization and one-third suggesting a positive move in direction. The remaining participants, however, were still undecided possibly because of fact that the merger process was ongoing. Organizational culture change is mindset change. The mindset change typically is a change related to the focus and implementation of the strategic vision of the organization (Sathe & Davidson, 2000). Burningham and West (1995) posit that a clear, attainable, and consensually shared vision or mission is a necessary condition if people are to be motivated to reach a goal by appropriate means, particularly if it involves innovation or change, “Totally different mission statements now . . . greater emphasis on research to detriment of industry and community work . . . governed from above, little local representation.” In addition, if the vision or mission is not derived consensually, it is likely that individuals will feel alienated and less important, “Significant changes . . . culture has changed from an organization where people used to count and now they don’t! . . . Now top down, autocratic style.” It is also important that this focus and vision is communicated to those involved in a manner which will ensure a change in mindset and ensure sustained motivation and support. If this does not occur very negative reactions may follow, “Very negative about new mission . . . now less emphasis on quality in teaching . . . no different to other major competitors . . . now budget driven.” In cases where the vision for change was communicated to persons involved, the response concerning the new missions and vision was always far more positive, “Significantly better, we are reaching out into more arms or sectors of the community.” While opinions were divided about the nature of the change to the mission of the organization, a significant proportion, 34%, of respondents had still not made up their minds and were “uncertain” about the direction. Many respondents (particularly those in the minor institutions) agreed that there had been significant changes to the culture and mission of the institution, even that the previous culture


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had been subsumed and disappeared. What was evident, however, was that, where consultation and involvement had taken place, greater acceptance resulted. RQ5. What was the nature of the influence that leaders had on the merger process, if any? Results in Table 2 indicate that there was no significant effect for either institution or organizational type (minor or major partner), where individual perceptions about the influence of leader are concerned. There was, however, a significant interaction between institution and organizational type. That is the influence of organizational type does depend on the institution. Post hoc analysis (Tukey test) revealed that the only significant difference occurred for minor organizations; specifically, Institution 1 reported significantly higher negative effects of leader influence than Institution 3. Opinions were divided about the influence of leaders on the merger process. Forty-five percent of participants suggested that the influence of leaders was negative and 36% that it was positive. There were, however, 19% still undecided. Champy (1995) notes that successful reengineering requires that managers “discard the fantasy of a corporate culture of reflexive obedience and undertake the hard work of creating a culture of leaned willingness and individual accountability” (p. 29). This process takes time and it is often the pace of change that inhibits the successful reengineering of the culture “Significant impact – mostly positive . . . Thinks that management were pressured by Government to change rapidly and were not able to take change slowly.” Employees look to top management for signs of true priorities. As Schein (1992) outlines, to reinforce changes and embed them into the organizational culture, organizational leaders should use direction of attention, role modeling, allocation of rewards, and criteria for selection and dismissal to reinforce their priorities, “Leaders embraced the changes and took a proactive, aggressive approach to establishing a competitive institution. Top-down management processes in early days were largely driven by political leaders and world trends. Organization’s leaders had to be responsive to this.” In tertiary institutions that are multi-campus, there is often mention made of the distinction between “local” leaders (those leaders who reside on peripheral campuses) and university leaders (those leaders who reside at the central or main campus). Local leaders are often seen as consultative, humanistic, communicating frequently with staff while university leaders are not “Leaders of Uni[versity] are dictatorial, lack of consultation now that Uni has more control of decision making.” Martin and Jones (2000) report that managers at the local level generally have greater responsibility for implementing major changes and therefore experience higher levels of change related stress, “Influence of leaders varied.

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Positive about some, including current head of department. Sees CEO . . . as very negative ‘Teflon man,’ everything that he does is to be blamed on either a Federal Minister . . . or those below and nothing will stick to him.” Fishman and Kavanaugh (1989) suggest that the climate of an organization and how people respond to change and innovation is shaped substantially by the behaviors of the supervisor, “Leaders had very significant impact, mainly negative, old boys network . . . no clear vision . . . no consultation with staff.” Trust is an important topic in organizational development particularly in a period when hierarchical structures are being dismantled and employees’ interactions increasingly self-managed (Burke, 1997), “Very significant negative influence. Decision-making has been secretive and politically motivated. I just can’t trust that man [leader] now.” Bass and Avolio (1994) and Conger and Kanungo (1987) claim that transformational leadership is the key to describing how organizational cultures are created and maintained. Leaders need to be competent and trained in the process of transforming organizations if mergers are to succeed, “Significant influence. Present leaders are driving rationalization. They keep promoting academic researchers to be managers and the fact is, they are hopeless at it.” Trice and Beyer (1993) suggest that consensus and transactional leaders are most effective at integrating cultures. Otherwise members of the culture become cynical and unresponsive, “Thinks there is lip service to consultation but it does not happen in reality. Has little faith in management abilities. We notice when the cleaners aren’t there but not the [department] heads.” Badaracco and Ellsworth (1989) describe leadership philosophies as political, directive, and values driven. Political leaders focus on political realities of decision-making, coalitions, sources of influence, persuasion tactics, trade-offs and compromises, “It was more a political process. Some leaders did use the process to build power base. I felt leaders had a very positive influence . . . this opinion not shared by everyone. Personally, treated with dignity, . . . felt it was pretty harmonious.” According to Weber’s (1978) theory of domination, those in power have more opportunity to realize their values and assumptions when changes occur, than do those not in power, that is, the struggle to define what matters and how cultural members behave, “In some cases leadership used the process to feather their nests and those of the people who cooperated.” In addition, only those who can be used to symbolize values and assumptions (the inner logic) will be able to sustain their power or their interpretation as leaders, “Initially leaders were inclusive, and staff felt some control over process. Under current management, people are not important. Most decisions made behind closed doors in inner circle.” As such, the beliefs of cultural members will determine not only how a leader will be regarded, but also who will be regarded as a leader.


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While not initially factored into the present study as a research question, it soon became evident that communication, or lack of effective and regular communication, was regarded as a leadership issue and should be a major priority in any merger process.

Communication When organizational change occurs, people must acquire many new concepts that must fit together into a comprehensible whole. Esterbille (1996) believes that those appointed to management positions can never over-communicate about major organizational changes. Through communication from management and among peers in a period of organizational change, employees may undergo change in both individual and organizational identities. If this does not occur there is a feeling of “No consultation. People were told what was going to happen. I don’t think it [the process adopted] was too sensitive at all.” Organizational changes that enhance the horizonal flow of information and empower employees to make decisions are critical to gaining the benefits of any innovation or change (Zammuto, Gifford & Goodman, 2000), “Leaders had very negative effect on process . . . not consultative . . . it’s management by dictate. Prior management very much collegiate, consultative, wanted to talk to people and find out what was going on. This attitude is no longer there.” These communication problems can lead to ill feelings and even to polarization (Blake & Mouton, 1984), which may result in misunderstanding and conflicts, “Initially we had input into decisions through the leader of local campus . . . positive. But process changed. Parent campus became less consultative . . . decisions imposed without local input . . . very negative influence, depersonalizing.” In summary, a strong association is clearly evident between individuals’ perceptions of organizational culture and communication. The implication is that the process of developing organizational values, norms, and expectations begins with communication (Klingle et al., 1995). Many respondents highlighted the importance of communication of information and consultation as part of the decision making process. Communication from management and other employees in an organization has been shown to be an important determinant of organizational culture (O’Reilly, 1989; Reilly & DiAngelo, 1990; Thomas, Ward, Chorba & Kumiega, 1990). It would appear that when tough decisions were to be made, many felt that leaders adopted a “closed ranks approach” and excluded staff members from the decision making process. This resulted in some staff resorting to factional activity, “. . . generally dissatisfied with the process. Lip service to consultation. Morale in my own department still reasonably good because we

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are gearing up for a common cause, a fight to survive [against relocation] as a department,” and the formation of counter cultures with negative consequences for organizational outcomes. RQ6. Did individuals perceive that the merger or change process had been managed well? Results in Table 2 indicate that there was no main effect for organizational type (major or minor partner), but there was a significant effect for institution in terms of how the change was managed. Reference to the mean scores in Table 2 indicates that individuals in Institution 1 felt more strongly that the merger process had been badly managed. Individuals in Institutions 3 and 2 experienced a lesser effect. Overall, 69% of participants felt that the change process had been badly managed. 26% were uncertain and only 5% thought that the change had been managed well. The success or otherwise of any merger change process hinges on the manner in which the process is handled. Kotter (1995) and Kaplan and Norton (1996) advocate a cyclical approach, involving ongoing or incremental change with a bottom-up organizational development approach. In general, where a cyclical approach is adopted, perceptions about the change process are more positive, “Generally satisfied. Thinks University [Institution 3] was ‘worn out’ by the time this College [last in the process of merging several institutions] was merged.” Sathe (1994) proposes major upheaval and transformation of the organization when a top down change effort is required. Such an approach seems to result in negative perceptions from those involved, “Not handled well. Divide and rule. They say they want to consult, but really minds have been made up.” Corwin et al. (1991) have argued that a requirement for merger success is a set of management strategies designed specifically to assist individuals to cope with stress and uncertainty created by the merger. It would appear from responses in the present study that one of the most important strategies is to allow participation of those involved. When this is perceived to be lacking very negative results eventuate, “It was done in an autocratic managerial fashion. Lack of participative, democratic decision making. The power within an academic community should be bound within the community, not within management.” At the deepest level of culture are the basic underlying assumptions (Schein, 1985). In any merger, consideration of these should be incorporated into the planned strategies for change management if external adaptation or internal integration is to occur, otherwise success is unlikely, “Not handled well. Leaders did not value existing structure and made no attempt to value strengths [of the institution]. No real consultation with staff. He [HOD] started out by saying that he was going to involve everybody . . . but . . . most of that was just puff and wind.”


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Diagnosing and monitoring employees’ beliefs, perceptions and motivations, especially those related to culture and climate are critical to any change effort (Trahant & Burke, 1996). When change occurs, it may affect the members of the acquired firm most strongly because they often are expected to adapt to the practices of the acquirer (Jemison & Sitkin, 1986; Sales & Mirvis, 1984). The size of the acquired firm relative to the other firm may influence the attitudes, motivation and turnover of personnel (Kitching, 1967; Walsh, 1989). Personnel in the smaller (minor) firm may feel unimportant, and their human needs may be overlooked or trivialized and, alienation may breed discontent, “Handled very badly, people certainly do feel that management doesn’t understand their work, or care about their work.” Failed implementation or change efforts are expensive in terms of time and financial costs as well as the personal toll they take on the individuals involved. They also breed cynicism and distrust that make later or ongoing attempts at change more difficult (Zammuto et al., 2000). “Terribly . . . no logical criteria given for forced redundancies. Staff to be axed not treated with dignity and respect when advised of job loss.” Rewards and punishments during a change process are not merely tools for shaping the behavior of the individuals receiving them; they are also symbolic. Carefully watched signals include who gets promoted, sidelined, dismissed, and selected (Nadler, Shaw, Walton & Associates, 1994), “Not handled well in terms of an organization which valued people, but in terms of an organization that wants to look efficient and please its Federal Government masters, it’s probably been done very well.” In conclusion, individuals seem to highlight the need for planning, consultation and even compassion in order for change management to be successful. Participants wanted a more transparent change process where reasons for the change are carefully explained and all who are involved have knowledge about what is taking place. The following comments, however, seems to sum up the overall feelings about how the process of change was managed in the institutions surveyed, “Very badly handled, abysmally even. Politics was the driving force. I think process was not sensitive enough to individuals.” RQ7. What method of acculturation did the individual perceive had taken place?5 Mergers have proven to be a significant and increasingly popular means of achieving corporate rationalization, diversity and growth (Cartwright & Cooper, 1996). In strategic management, mergers are most commonly classified on the degree of relatedness of two firms. In the present study, all merging partners were related in that they were all higher education institutions providing tertiary

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Fig. 1. Method of Acculturation Adopted in Each Institution.

courses. The main motive behind the mergers according to a senior administrator “. . . was to achieve synergies in operation.” Although acculturation is considered to be a balanced two-way flow, in a merger process members of one culture often attempt to dominate members of the other (Berry, 1980; Keesing, 1953). More importantly, the concept of acculturation as it is used in cross-cultural research focuses on the desires of the members of the culture that is being invaded; it also focuses on the way in which these members adapt to the intruder (Nahavandi & Malekzadeh, 1988). In the present study, participants were given definitions of four models of acculturation (assimilation, integration, separation and deculturation) as proposed by Nahavandi and Malekzadeh (1988). They were then asked to nominate the model which best suited the process which had evolved in their own institution. Method of acculturation was not the same for each institution and comments varied largely due to the different merger processes that evolved in each institution (Fig. 1). In Institution 2, reaction to the merger was swift and immediate and the changes were made in a short period of time. Institutions were closed; individuals were relocated and integrated into larger partners. Individuals in this institution nominated integration and deculturation as the method of acculturation, “Forced Integration. The smaller organization would see the merger as a takeover,” and “Integration but thinks that they moved to something new rather than any of the models. More like colonization.” In Institution 1, following the announcement of the merger, a sense of indifference prevailed and while committees met and discussions occurred, no significant structural change took place for several years with the merging partners continuing to operate separately during that time. At the time of our study, a greater sense of urgency now prevailed as formal changes were being put in place. Some aspects of the organization had been integrated and assimilated while other sections still operated separately as a result of the delay. Rather than one culture being prevalent at any one time, the interviews revealed that how culture


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was viewed depended on group or institutional affiliation and stage of the merger process. Many individuals in the minor partner alluded to a culture lost, however, “Deculturation but does not agree that own culture was not valued. It was a bit like the native welcoming the white man in the big boats and looking forward to trading with them,” and, “Deculturation but also uses the metaphor of colonisation. Original organization was colonized by the joining the bigger group.” Individuals interviewed from the major partner of this institution were “not sure [as they had not been affected greatly but thought that] assimilation and integration were the most likely models.” In Institution 3 an incremental process was employed, with negotiations with one merging partner at a time occurring, beginning with those partners who were keen to be part of the larger university. Individuals in this institution nominated assimilation and separation as the method of acculturation. The fact that the merger process in Institution 3 had been incremental was evident in the comments made by individuals “Separation initially, but moving towards integration. There is still a feeling of we might have amalgamated but we will do it our way, this way. The problem then becomes one of trying to serve two masters,” and “Generally assimilation but culture has not necessarily been (sic) relinquished nor adopted willingly.” At the time this research concluded, the merger process was ongoing in Institution 3, with some partners still not merged. In summary, the approach adopted to manage the merger, i.e. immediate, incremental, indifference, resulted in very different outcomes in terms of perceived acculturation method. It would appear that the incremental approach resulted in the most positive outcomes with individuals more accepting of gradual change process. The immediate approach resulted in a swifter move to integration and the deculturation of minor campuses. At the time this study was completed most individuals had accepted the change and moved on. The indifferent approach, however, seemed to create the greatest upheaval. Individuals, lulled into a sense of false hope by the delay, reacted negatively when major change could no longer be put off and occurred very rapidly.

DISCUSSION AND CONCLUSIONS Contributions to Theory and Practice We see our study contributing to theory in three ways. First, it integrates what is known about organizational change more generally with cultural change in particular (Martin, 2002). Second, the research determines cultural differences between merging partners and uses four perspectives assimilation, integration,

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separation and deculturation, to assess the cultural change process. Third, the study gives voice to the perceptions and opinions of those who are most affected by the merger, individual staff members at all levels, and highlights the fact that different groups of individuals may perceive the merger differently (accepting to resisting) with consequent implications for the way acculturation following the merger is viewed. Most mergers arise as a result of the need to rationalise, increase efficiency, or reduce costs in some way. Unless mergers are handled effectively, however, the reverse usually occurs (Cartwright & Cooper, 1996). What was evident in this study was the fact that managers responsible for driving the merger process were not equipped with appropriate communication or change management skills which led to negative perceptions by individuals about the manner in which the process was managed. This had consequent detrimental effects on the ability of individuals to embrace the changes required by the merger and view the “new organization and its culture” in a positive manner. Appointment of a skilled change management facilitator or champion to lead the change should occur at the start of any merger process. As mergers bring together two of more different cultures, an assessment of the culture of the merging partners, and the extent of allegiance by individuals to their culture, should be undertaken at the commencement of the merger. This will determine the direction cultural change should take and the likely amount of individual resistance to change. Merger partners need also: (1) to select carefully the method or process to be used to manage the merger and develop a new culture following the merger (method of acculturation); (2) to establish effective channels of communication which involve individuals at all levels of the organization; (3) to select willing partners first and move to more difficult partners after allowing more time for consultation and justification; and (4) to allow people to be “changed” with dignity by acknowledging contributions and justifying the need for them personally to move on.

Limitations of the Study We acknowledge that the information presented in this study is from an analysis of the notes and transcripts of interviews and includes judgments made by humans which are especially prone to error. While sampling was random, it is not claimed that these views are indicative of the views of all academic staff in each institution. When evaluating data collected it has to be remembered that data yielded by different techniques differs in kind (Shrout & Fleiss, 1979). In


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addition, since the data collected from individuals during interviews were used to attribute observed relationships to a level (organization) other than the actual behavioral or responsive unit there is a danger of misspecification. James (1982) has addressed this issue by exploring the extent to which data derived at the individual level can tell us something about a specific unit-level phenomenon. A case has been made for the use of aggregated data as they meet such criteria as inter-rater agreement. The present study also involved cross level and multi level research which implies a hierarchical relationship among things. The basic problem in multi level research (Klein & Kozlowski, 2000) is mis-specification. For example, by attributing individual descriptions of their involvement in decision making during the merger and correlating this with individual outcomes, any extrapolation about organizational structure and performance risks misspecification (Rousseau, 1985). For this reason, the emphasis has been in the study has been to allow individuals “to tell the story” as they perceived it, and no attempt has been made to infer outcomes for the institution. The final limitation relates to the fact that this qualitative study was conducted at a time when significant government funding cuts were being imposed and some restructuring was occurring as a result of those funding cuts and not directly as a result of the merger of institutions.

Directions for Future Research This study is one of the few studies to analyse mergers in the tertiary education sector. Future research could examine whether the findings in this study are generalisable to other educational settings within and outside Australia. In addition, the population for this study was drawn from academic faculty. The study could be replicated to include staff from both administrative and academic populations to enable comparisons to be drawn. Future research could also include the effect of control variables (e.g. public vs. private organizations, organizational size, and financial status) to shed more light on factors that cause organizational cultures to move in the direction they do following a merger. The present study also determined cultural differences between merging partners and used four perspectives – assimilation, integration, separation, and deculturation, to assess the acculturation process following change. It also identified that the method used to manage the changes associated with the merger had different outcomes for individuals and their perceptions about the method of acculturation that transpired. Further work needs to be done to test

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the three change methods – incremental, immediate and indifferent, in other merger situations to test generalisability. Conclusions The qualitative component in this study enabled issues that arose during mergerevoked change in three large tertiary institutions, to be examined in a diagnostic manner, so that the most prominent outcomes or effects could be appropriately highlighted. Including the views of individuals who had participated in the change delivered a sense of passion and realism about the events, and the effects on both individuals and the culture of the institution. Issues concerning individuals, including the effect of the change and ability to adapt to change, were examined. The effect of mergers on the organization and its culture and the need for effective change management strategies to facilitate acculturation following the merger were addressed. The sentiments expressed by one respondent seemed to sum up the feelings of the majority: The change is significant. There appears to be a breakdown in the pre-existing social system with a new competitive system which undermines collaboration and existing safeguards for individual creativity . . . No change in my intrinsic values and beliefs about what is important in life. I am trying hard to fit the mould which has been cast . . .. There has been a very significant change in culture and a new one imposed. The sense of community is lost, people feel swallowed up and isolated. I accept change as inevitable but feel people are more resigned to accepting the process than satisfied. I see benefits as a result of the merger for overall performance in spite of difficulties of structural change . . . Change not handled well. Process has been divisive. Lack of input into decision-making with the new culture imposed . . . There was little concern in any of this for the people involved, they were like pawns.

Finally, the method of acculturation that followed the merger was not so much a product of the degree of congruence or similarity between the cultures, but rather a result of the manner in which the merger process was managed in each institution. The outcomes for both individuals and organizational acculturation were driven by: (a) the method employed to manage the merger process that is incremental, immediate, indifferent; (b) the fact that method of acculturation following a merger was not planned but, rather, evolved; and (c) conflict that arose as a result of differences between organizational culture types and individual values that could have been resolved by consultation and justification that, in most cases, did not seem to occur. Results, however, would seem to support the incremental approach in terms of more satisfactory outcomes for individuals. This approach led to less resistance by most individuals and greater levels of assimilation and integration between the cultures following a merger, and with no evidence of feelings of deculturation.


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NOTES 1. An EFTSU is equivalent to 1 for each full time student and 0.5 for each part time student. 2. Institution One viewed the merger as necessarily beneficial to the survival of the minor institutions and peripherally beneficial to the main institution. It adopted an approach to “hasten slowly” and took some seven years after formalisation of the merger before real change was invoked. At the time of the study the process was ongoing. Institution Two viewed the merger as mutually beneficial to all parties and invoked changes quickly so that rationalisation occurred, new structures were put in place, smaller campuses closed and staff moved. At the time of the study the process had well and truly been completed. Institution 3 viewed the merger as an opportunity to expand in a rational manner. An incremental approach was adopted in that merger with the most willing partners occurred first and negotiations with other institutions then proceeded. At the time of the study the process was ongoing. 3. CAEs (Colleges of Advanced Education) are the equivalent of English Poly Tech Colleges or 2 year Colleges in the U.S. 4. Research Question 7 required participants to nominate specifically what method of acculturation took place. Results were definitive and ANOVA statistics not necessary. 5. Method of Acculturation as defined by Nahavandi and Malekzadeh (1988) as Assimilation, Integration, Separation, and Deculturation.

ACKNOWLEDGMENTS The authors acknowledge the assistance of Charlotte Armstrong, Stephen Cox, Marie Dasborough, Noreen Kelly, and Tracey Lye in collecting the data and assisting with preparation of this manuscript. Funding provided by the Australian Research Council and The University of Queensland assisted with the completion of the study.

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ACQUIRER RETURNS WHEN BUYING PUBLIC VERSUS PRIVATE FIRMS Laurence Capron and Jung-Chin Shen ABSTRACT The volume of acquisitions involving privately held targets has far surpassed that of publicly traded firms in recent years; yet, surprisingly little research has examined private target acquisitions. By analyzing the unique features of the market for private targets, we compare the potential for value creation and value capture in private and public target acquisitions. We argue that the corporate context of private targets does not provide the same opportunities for curbing agency costs and sharing intangible resources than the context of public targets, which reduces the value creation potential for the buyer. On the other hand, private targets have lower bargaining power vis-à-vis acquirers because of higher failures in the market for corporate control of private firms and liquidity discount, which increases the value creation potential for the buyer. The net value creation potential of acquiring private targets, therefore, depends on the relative importance of their agency costs, resource sharing opportunities, and bargaining power.

INTRODUCTION The volume of acquisitions involving privately held targets has far surpassed that of publicly traded firms in recent years. In the United States, for instance, out of the 6,731 companies that were acquired in the manufacturing sectors during the Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 35–53 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03002-9

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period 1996–1999, more than 53% were private companies (Shen & Reuer, 2003). Similarly, Moeller, Schlingemann and Stulz (2003) studied 8,225 acquisitions of independent targets by public firms in the U.S. between 1980 and 2001, with a transaction value above US$1 million, and found that 67% of these acquisitions involved privately held firms. Yet, private target acquisition remains largely unexplored. Almost all previous studies examining U.S. mergers have focused on publicly traded targets (Asquith et al., 1983; Berkovitch & Narayan, 1990; Comment & Jarrell, 1995; Lang et al., 1989; Rau & Vermaelen, 1998; Stulz, 1988). The scantness of research on acquisitions of privately held firms is largely due to the unavailability of information on private firms and on the terms of these acquisitions. The study of private targets is of interest not only because of the sheer volume of acquisitions involving these firms, but also because recent research suggests that they differ greatly from public targets. Chang (1998) finds that, unlike acquisitions of publicly traded targets, bidders of large, privately held targets experience positive abnormal returns in stock offers. Two recent studies (Ang & Kohers, 2001; Fuller, Netter & Stegemoller, 2002) show that acquisitions of privately held targets yield substantial gains for bidders, regardless of the method of payment used. In addition, strategy research has recently shown that bidders tend to acquire public rather than private targets when they face valuation problems due to information asymmetry in the acquisition process. Notably, bidders are more likely to acquire public targets than private targets when they purchase firms with significant intangible resources (Shen & Capron, 2003; Shen & Reuer, 2003). Acquirers are also more likely to use earnouts as the method of payment when the target is a private company (Datar, Frankel & Wolfson, 2001). In this study, we draw on the finance and strategy literatures to examine the unique features of the private target acquisition market. In the first section, we formulate propositions regarding the impact of differences in agency costs and resource transfers on the potential for value creation in acquisitions that involve privately vs. publicly held targets. In the second section, we formulate propositions regarding the impact of differences in bargaining power on the potential for value capture in acquisitions that involve privately vs. publicly held targets. We then review the empirical literature and find preliminary support for our propositions.

VALUE CREATION IN PUBLIC VERSUS PRIVATE TARGETS Strategy and finance scholars argue that corporate takeovers serve two important functions: First, the very threat of a takeover disciplines management, reminding

Acquirer Returns when Buying Public Versus Private Firms

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them that they risk being ousted if they do not act in the best interest of their shareholders. Second, corporate takeovers allow acquiring firms to generate economies of scale or scope, to apply superior knowledge or skills, or to attain synergies by sharing resources.1 In the present section, we examine the extent to which managerial disciplining and synergy justifications of acquisitions apply to privately held targets.

Creating Value by Disciplining Targets’ Managers: The Agency View An Acquirer can Create Value by Reducing Agency Costs The agency view argues that acquisitions can be an effective way to reduce agency costs and to improve the operations of mismanaged firms. Agency theorists postulate that managers have considerable discretionary power over the use of corporate resources, and exercise it to pursue their own interests rather than to maximize shareholder value. Agency costs arise when the managerial and ownership functions are separated and ownership is dispersed, and because contracts are not costlessly written and enforced (Berle & Means, 1933; Jensen & Meckling, 1976). These costs are a function of the difficulty of developing contracts designed to completely spell out the actions that managers are to take in the interest of a firm’s owners. Moreover, because it is costly to monitor the performance of managers relative to the actions specified in contracts, decision-making agents may engage in value-destroying activities. For example, managers may undertake empire-building acquisitions or continue diversification to increase their social status and compensation, or to secure their own employment. As a result, the optimal size of the firm from the managers’ point of view is larger than the optimal size from the shareholders’ point of view (Weston et al., 1998). Corporate governance is designed to mitigate the potential conflicts of interest between managers and shareholders. Internal mechanisms include board structure, debt financing and executive director shareholdings. Each of these internal mechanisms has its own limitations in aligning shareholder and manager interests (Allen & Gale, 2000; Walsh & Seward, 1990). The key external mechanism is the market for corporate control, which acts as a mechanism of last resort (Fama, 1980; Jensen, 1986). The probability of replacement following an acquisition provides a direct incentive for top management to perform well (Kennedy & Limmack, 1996; Martin & McConnell, 1991). In line with earlier work developed by Berle and Means (1933) and Manne (1965), the theory of `ımarket for corporate control posits that, as top managers engage in behavior of self-interest, their company’s performance is likely to increasingly diverge from its maximum potential. This underperformance is

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reflected in the value of the company’s stock. In such circumstances, other management teams are likely to invite shareholders to replace the incumbent management team. The market for corporate control is, therefore, the competition among management teams for the rights to manage corporate resources. Privately Held Targets and Publicly Held Targets Have a Different Agency Context The higher concentration of ownership often found in privately held companies compared with publicly traded firms should lead to fewer internal agency conflicts. Concentrated shareholders have substantial incentives and power to monitor managers and reduce professional managers’ free-riding problem associated with a structure of small, and atomistic shareholders (Demsetz & Lehn, 1985). Proponents of leveraged buyouts (LBOs) argue that post-LBO corporations, with their highly leveraged capital structure, high percentage of ownership of managers, and close monitoring by the sponsors2 of the buyout, have a superior incentive structure to the pre-LBO corporation (Jensen, 1989). Since agency conflicts are lower with increased inside ownership, we argue that privately held companies provide fewer opportunities for improving the target’s management through the replacement of non profit-maximizing managers. Privately held companies are also often family-owned, which often reduces agency problems. Because family members are either directly involved with the management of the firm or have the power to monitor management closely, family-controlled firms are more profit-maximization oriented, and are less likely to invite a takeover. For example, the kinship and social relations among family members ensure that managers will not expropriate shareholder wealth through the consumption of perks and the misallocation of resources. In addition, families maintain a long-term presence in their firms. They typically have longer horizons than other shareholders and are therefore more willing to invest in long-term projects. Stein (1988) shows that firms that have shareholders with longer investment horizons suffer from less managerial myopia and are therefore less likely to forgo good investments in order to boost short-term earnings. By anticipating the transfer of the business to a family member in the future, family firm decision makers with an extended horizon mindset may be more likely than non-family decisions makers to make decisions that improve the viability of the company over time (James, 1999). Finally, if the extent of the family’s ownership interests is substantial, family-controlled firms are more difficult to take over because the family has the power to veto unwelcome bids. In short, agency theory suggests that privately held family-controlled firms should have less deviation from profit-maximization behavior. Less room is left for efficiency improvement through disciplining a private target’s management.3


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Proposition 1. All else being equal, we expect value created by reducing agency costs to be higher in public targets relative to private ones.

Empirical Evidence: The Agency View Several empirical studies provide preliminary support for our first proposition. Davis and Stout (1992) find that family-controlled firms are less likely to become takeover targets. They examine the risk of takeover by using event-history techniques on time-series data covering all takeover bids for Fortune 500 firms between 1980 and 1990. They interpret the results as evidence that a controlling block of ownership in family-controlled firms reduces agency problems. In parallel, Field and Karpoff (2002) find that IPO managers tend to deploy takeover defenses when their compensation is high, shareholdings are small, and oversight from non-managerial shareholders is weak. These results are in line with studies that show that private firms tend to be better managed than public firms (Anderson & Reeb, 2003), and therefore less likely to invite takeover. Capozza and Seguin (2003) find that managerial expenses are lower as inside ownership increases. Still, private firms are not equally well managed. For example, Durand and Vargas (2003) find that, within a sample of private firms, owner-controlled private firms are more efficient than agent-led private firms. This suggests that the closer the alignment of ownership and management, the lower the likelihood of a self-serving attitude and inefficient use of resources. Research on LBOs shows that substantial gains can be reached when managers retain an important equity stake in the assets they manage. Companies that conducted an LBO in the sample period, experienced improvement in operating profits, both in terms of absolute value and relative to their industry average (Kaplan, 1989; Kaplan & Stein, 1993).

Creating Value by Leveraging Unique Resources: The Resource-based View An Acquirer can Create Value by Leveraging Unique Resources The synergy hypothesis argues that acquisitions can provide opportunities for achieving economies of scale or scope, and for leveraging the unique set of resources between the acquirer and the target. In this paper, we focus on the synergies associated with access to intangible resources because they constitute a greater discriminating factor between public and private targets. The resource-based view implies that in order to gain a sustainable competitive advantage, a company should possess rare, valuable, inimitable, and

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non-substitutable resources (Barney, 1991). Among all the resources that a company possesses, intangible resources are an important source of sustainable competitive advantage because they are difficult to imitate or to acquire (Barney, 1991; Dierickx & Cool, 1989; Itami, 1987). Intangible resources are informationbased resources that include intellectual property rights, know-how, brand, and reputation (Capron & Hulland, 1999; Itami, 1987). The resource-based view posits that intangible resources are particularly susceptible to market failure arising from asymmetries of information between sellers and buyers. Acquisitions are seen as a way of acquiring needed intangible resources that are difficult to obtain through alternative means (Capron, 1999; Finkelstein & Haleblian, 2002). Acquisitions can help overcome market failures associated with purchasing “off the shelf” intangible resources, which are tacit, span many functions within the firm, and are embedded in the firm’s culture and processes (Capron, Dussauge & Mitchell, 1998; Wernerfelt, 1984). Acquisitions also help by-pass the limitations associated with strategic alliances, which carry partner asymmetries in resource contribution, objectives, agendas, and learning processes, thus creating relationship instability (Capron, Mitchell & Oxley, 1999; Doz, 1996; Hamel, 1991). Last, acquisitions take less time than internal growth, while providing the opportunity to overcome the acquiring firm’s resource limitations (Capron & Mitchell, 2003; Dierickx & Cool, 1989). Although an acquisition represents a stronger mechanism to acquire intangible resources than alternative means, information asymmetry between the buyer and the seller still exists and makes it difficult for acquirers to assess the synergies stemming from the combination of intangible resources. As a result of this information asymmetry, the buyer is likely to make an adverse selection (Akerlof, 1970), and the seller is unable to get superior quality reflected in higher prices (Dierickx & Koza, 1991). Previous M&A studies have noted that information asymmetry decreases the likelihood and performance of acquisitions (Balakrishnan & Koza, 1993; Coff, 1999; Eckbo et al., 1990). Privately Held Targets and Publicly Held Targets Represent Different Mechanisms for Trading Intangible Resources Information asymmetry problems are likely to be more severe in the context of the acquisition of a privately held target, as compared with the acquisition of a publicly held target because the equity market reduces information asymmetry. First, the signals attached to being publicly traded and the greater information disclosed on public targets can directly mitigate information asymmetry problems. Public companies are required to disclose information for registration and subsequent listing, and report financial statements audited according to generally accepted accounting principles. Investors and analysts also exert pressure on


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public companies to report detailed financial statements. In contrast, privately held companies are not subject to either government public disclosure requirements or to the pressures of public equity markets. The financial statements of private companies are subject to more distortion because independent third-party auditing is not required, and also because private firms tend to report financial statements in a way which is apt to minimize the taxable income (Gaughan, 1999). Second, the initial public offerings process can also directly mitigate information asymmetry problems. Initial public offerings (IPOs) can be viewed as a signaling mechanism that differentiates high from low quality firms (Spence, 1974). High quality firms, for example, can underprice their newly public issues as a means of signaling their healthy quality and differentiating themselves from low quality counterparts (Allen & Faulhaber, 1989). Moreover, financial institutions associated with the IPO can certify and signal the quality of the firm going public. Third, publicly observable share prices for public targets reveal collective judgment of dispersed investors (Hayek, 1945) and important information about the business. The equity market serves to place a price on the public firm. The price aggregates heterogeneous information and incorporates collective judgment of investors. The price can therefore help buyers calibrate their bids (Hellwig, 1980). Stock markets play the monitoring role in revealing information and disciplining managers’ behaviors. It has been suggested that share prices offer performance information that cannot be extracted from a firm’s current or future accounting data (Holmström & Tirole, 1993). In summary, the reduction in asymmetric information associated with the fact that a target firm is publicly listed can help acquirers screen targets with high value creation potential from targets with low value creation potential, and thus calibrate their bids, which increases the likelihood of recouping the acquisition premium (Ellingsen & Rydqvist, 1997). This is even more important for the purchase of firms with high intangible assets, where valuation problems are severe. When firms need to buy intangible resources, they are likely to be more reassured when buying a public firm than a private target. We therefore expect public targets to provide safer opportunities for trading intangible resources than private targets would do. Proposition 2. All else being equal, we expect higher variance in value created by trading intangible resources in private targets relative to public ones.

Empirical Evidence: The Resource-based View Recent studies provide evidence that information asymmetry problems are fiercer for private targets than for public targets. Simon (1989) finds that information

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disclosure regulation reduces the dispersion of investors’ forecast errors in the stock market. Brynjolfsson, Hitt and Yang (2002) show that financial markets provide important valuation information for intangible assets. In the same vein, Datar, Frankel and Wolfson (2001) show that acquirers are more likely to use earnouts as the method of payment if the target is a private company. Reuer and Shen (2002) find that private firms sometimes go public just before being acquired, even though the IPO is costly. Their findings are consistent with the notion that an IPO can be used as a strategic means to signal quality information. As stated in a recent Wall Street Journal article’s title, “IPOs are more than fundraisers” (June 10, 2002). For example, software and IT firms have recently gone public to gain attention and to enhance their credibility among customers. Plumtree Software recently went public “to provide increased visibility and credibility in the marketplace,” and Veridian’s CEO commented that a key benefit of its offering was “the awareness that comes from being public.” Enhancing the company image and visibility is ranked across surveys as the second motivation of going public, very close behind the primary motivation of finding financial support (Röell, 1996). Based on a survey of post-acquisition resource transfers of 101 horizontal acquisitions, Shen and Capron (2003) find that acquirers’ propensity to redeploy the intangible resources of the target is higher in acquisitions involving public targets than in those involving private targets. Shen and Reuer (2003) find that public targets become more attractive relative to private firms when would-be buyers confront valuation challenges due to information asymmetries in the acquisition process. Specifically, they find that buyers are more willing to acquire public targets that have significant intangible resources than equivalent private firms. They also find that buyers tend to prefer public targets over private targets when acquiring younger businesses. Moreover, firms are willing to acquire private targets in their core business, but in non-core domains, the stock market appears to be useful as a means of screening potential targets that the acquirer would otherwise find more difficult to assess. Overall, existing empirical evidence is consistent with the idea that the equity market can help mitigate information asymmetry problems in the market for corporate control. Public targets are thus more likely to be used for trading intangible assets than private targets.

VALUE CAPTURE IN PUBLIC VERSUS PRIVATE TARGETS Higher value creation potential does not necessarily lead to higher returns for bidders. The proportion of the value created by the acquisition that the acquirer


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can capture depends, to a great extent, on the respective bargaining power of the target vis-à-vis the acquirer (Capron & Pistre, 2002; Chatterjee, 1992). We argue that it is harder for the acquirer to capture value from a publicly held target than from a privately held target. In the light of the functioning of the market for corporate control, publicly held targets are more visible and liquid. Publicly held targets are thus generally more powerful than private targets, relative to their buyers, and are able to command a higher control premium.

Capturing Value is a Function of Competition in the Market for Corporate Control An Acquirer can Capture Value when the Market for Corporate Control is Not Highly Competitive In many cases, even when the merger creates value thanks to a good resource fit between the target and acquirer, the market allocates the full synergistic gains to the target’s shareholders rather than to the acquirer’s shareholders. Many studies show that strategic relatedness (a proxy of synergy4 ) is not a sufficient condition for an acquirer’s shareholders to earn abnormal returns (Barney, 1988; Lubatkin, 1987; Singh & Montgomery, 1987). Value creation does not ensure value capture by the acquirer when the competition among potential bidders drives up the target price until the net present value for the successful bidder is close to zero (i.e. the synergies are equal to the premium paid). As a result, even in a synergistic deal, acquirers can earn abnormal returns only when the market for corporate control is imperfectly competitive (Barney, 1988; Mitchell & Capron, 2002). In a competitive acquisition market, multiple bidding tends to increase control premiums and reduce bidder returns, which is consistent with the lack of significant positive abnormal returns on average for acquiring firms found in many finance studies (Asquith, 1983; Jarell, Brickley & Netter, 1988; Mandelker, 1974). Privately Held Targets and Publicly Held Targets Face Different Markets for Corporate Control Bidders of a publicly held target are more likely to face fiercer competition in the market for corporate control, and are therefore more likely to overpay for their target, than bidders of a privately held target. Public targets are more visible to would-be buyers, and thus can benefit from a more competitive bidding process. For instance, firms that go public engage in an intensive marketing effort through road shows, subsequent registrations and offerings; public firms not only present themselves to the investment

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community and attract media attention, they also tap into the underwriters’ business relationships. Sales of public targets are auction-like that usually involve multiple bidders in open markets, while private targets are typically sold through negotiation based on voluntary exchange (Zingales, 1995). A target firm in a relatively poor bargaining position vis-à-vis that of the potential acquirer, can benefit from the auction process inherent in the stock market (Milgrom, 1987). Bulow and Klemperer (1996) show that an auction is almost always preferable to a negotiation in selling a company. No amount of bargaining power is as valuable to the seller as attracting one extra bidder. The value of negotiation skills is small, compared to the value of additional competition. Note that large private targets can organize auctions that increase competition among bidders. Yet, in many cases, private targets tend to be smaller and cannot afford the costs associated with setting up an auction process. Bidding for a publicly held target can lead to herd behavior and intense competition among bidders that are under media and financial community scrutiny. Most bidders tend to bid more aggressively as the number of competing bidders increases (Kagel & Levin, 1986). As a result, bidders for public targets are more likely to be subject to the winner’s curse. The winner’s curse is the fact that the winner of a sealed-bid auction for a hard to value company tends to be the one who most overestimates the true value of the target. As a result, the winner who fails to recognize this adverse selection effect is likely to be “cursed” by having paid too much for the target. Finally, acquirers of public targets are prone to overpaying as a result of the free-rider problem of shareholders (Grossman & Hart, 1980). Because in the case of a tender offer, each shareholder has an incentive to hold on to their shares and wait for a higher return if the tender offer is successful, the winning bidder may have to pay the full price for the possible synergistic gains; otherwise, mutually beneficial takeover transactions will not occur. Consider a target with 10 shares outstanding, each selling at US$20. Now, assume that a potential acquirer can increase the value of the target to US$300 after taking over the target. The potential acquirer can offer US$25 per share (a 25% premium) to the shareholders of the target. If the offer is successful, the share price will rise to US$30 per share, above the US$25 offer. If the takeover fails, the share price will fall back to the pre-offer level of US$20 per share. As a result, each shareholder’s best strategy is to hold on to their shares because they can get a higher price if the tender offer succeeds. However, if every shareholder thinks this way, no share will be sold and the tender offer will fail. This is because every shareholder wants to free ride on other shareholders’ sell-offs. The shareholders of a public target may thus get a better deal in an acquisition than shareholders of a private firm. Further, it may also be the case that with acquisitions of private firms, the owners may want to


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sell their firm (Moeller, Schlingemann & Stulz, 2003). They may want to exit or be in a position of needing extra financial or human resources to grow. In summary, as a result of a more competitive market for corporate control of public firms, we expect publicly held targets to have greater bargaining power vis-à-vis the acquirer, which reduces the potential value that can be captured by the acquirer. Proposition 3. All else being equal, we expect the value captured by the acquirer’s shareholders to be lower in public targets relative to private ones due to higher competition in the market for corporate control of public targets.

Empirical Evidence: Competition in the Market for Corporate Control Empirically testing the difference between auctions and negotiations in the context of M&A is very difficult because data on the premium paid by the acquirer of a private target is hard to measure, and usually not available. A great deal of evidence is offered by experimental studies. The private value auctions theory5 suggests that if being publicly traded can attract more attention to a public target from potential buyers, as the number of bidders increases, bidders of a public target ought to increase their bids. Battalio, Kogut and Meyer (1990) find that subjects increase their bids as the number of bidders increase from five to ten (even though the underlying distribution of private valuation remains constant). Likewise, Dyer, Kagel and Levin (1989) report a similar result in a contingent bid setting. Based on a sample of successful tender offer contests for public targets occurring over the 1963–1984 period, Bradley, Desai and Kim (1988) find that the number of bidding firms is positively related to the returns to targets and negatively related to the returns to acquirers. Seth, Song and Pettit (2000) find that successful acquirers in single bidder transactions retain about 40% of the total gains on average, whereas acquirers in multiple bidder transactions make small losses. Experimental studies provide further evidence regarding the effects of uncertainty on the number of bidders. McAfee et al. (1987) and Mattews (1987) show that in independent private value first-price auctions, if the number of bidders is unknown, and bidders have constant or decreasing absolute risk aversion, the expected price is higher if the actual number of bidders is concealed rather than if it were revealed. The winner’s curse has been observed in several industries such as auctions for oil drilling, book publication rights, and professional baseball’s free agency market (Kagel, 1995; Thaler, 1988). Statistical evidence is usually provided by laboratory experiments, which conclude that bidders systematically fail to recognize the adverse selection problem and end up with a loss (e.g. Kagel & Levin, 1986;

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Samuelson & Bazerman, 1985). The winner’s curse persists with experience, even though the magnitude and frequency of losses decline (Lind & Plott, 1991). Finally, two studies report the winner’s curse in corporate takeovers. Giliberto and Varaiya (1989) examine the effect of bidder competition in acquisitions for failed bank auctions. Consistent with the winner’s curse hypothesis, they find that the price proposed by each bidder increases with the number of bidders. Finally, recent research on entrepreneurial ventures finds that it is often the case that owners of firms benefit greatly from being acquired when they face expansion hurdles such as a CEO search or a funding round. When choosing potential buyers, sellers consider more than price, and focus on cultural fit, post-acquisition survival of brands and products, and employment (Graebner & Eisenhardt, 2002). Capturing Value is a Function of Share Liquidity Privately Held Targets Face a Liquidity Discount Another reason that bidders are less likely to overpay for private targets is their lower liquidity (Fuller et al., 2002). Liquidity refers to the speed with which an asset can be sold without incurring a significant loss. The presence of an active resale market for shares of public firms makes public targets more liquid than private targets since private targets cannot be screened and bought as easily as public targets. Furthermore, when screening potential targets, bidders of publicly held targets benefit from reduced search costs and can draw information on a target from various sources ranging from the business press and investment banks to social networks in the investment community. Consequently, the lack of liquidity makes private targets less attractive and less valuable than comparable public targets, resulting in a liquidity discount for selling off private targets. The liquidity discount, associated with private targets, also reduces the premium necessary to take control of a private firm. Proposition 4. All else being equal, we expect the value captured by the acquirer’s shareholders to be lower in public targets relative to private ones due to a liquidity discount associated with private targets. Empirical Evidence: Liquidity Discount The liquidity discount argument suggests that private targets need to discount their price to reflect their lower liquidity. Four main methods have been used to estimate private company discount: (1) the restricted stock method; (2) the over-the-counter6 (OTC) method; (3) the IPO method; and (4) the acquisition method.


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The restricted stock method compares the price at which public firms issue restricted shares in private placements relative to the publicly traded stock price. Using this approach, Wruck (1989) and Hertzel and Smith (1993), among others, find an average discount of 17.6% and 13.5%, respectively. The OTC method compares the prices of stocks traded on the New York Stock Exchange with those of comparable stocks traded on the OTC market. Using this approach, researchers from the Securities and Exchange Commission find an average discount of 26% (Gaughan, 1999). The IPO method compares the share prices of firms at the IPO to transaction prices in those same shares prior to the IPO. Following this method, Emory (1994) finds an average significant discount of 45%. However, this method is subject to a serious selection problem as it considers only successful IPO firms. Finally, the acquisition method compares acquisition prices for public and private companies. Koeplin, Sarin and Shapiro (2000) find that private firms are purchased at a substantial discount as compared with their equivalent public counterparts. Based on a sample of 331 private acquisitions, Kooli et al. (2003) find that the median private target discount is 34% (when using an earning multiple) and 20% (when using a cash flow multiple). They also find that the median discount decreases during years of high M&A activity and decreases during years of low M&A activity. In other words, given the ease with which private firms could exit through IPOs in hot years, the owners of these firms would not have had to apply a high discount to their firm’s value. In summary, all methods provide converging results to support the idea that target firms are likely to be traded at a significant discount.

CONCLUSION: PROPOSED FRAMEWORK In this chapter, we compare the returns to bidders for public vs. private targets. Acquirer returns can be decomposed into two categories: value creation and value capture. Value creation through M&A is driven by restructuring and synergy gains. Restructuring gains are the improvement in the target’s operations by removing ineffective managers. Synergy gains are the benefits associated with sharing complementary resources (notably intangible ones) between the merging firms. We argue that publicly held targets provide greater opportunities for reducing agency costs since managerial expenses increase as inside ownership decreases. We also argue that publicly held targets are a less risky means of trading intangible resources because the signals attached to being publicly traded and the greater information available on public targets mitigate the information asymmetry associated with the purchase of firms with high intangible assets.

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Fig. 1. Sources of Acquirer Returns in Public vs. Private Targets. Note: The sign (+) means that high level of agency issues leads to greater value creation potential for the buyer.

However, the acquirer can only capture the proportion of the value created by the acquisition that will not be retained by the shareholders of the target. It is generally more difficult for acquirers of publicly held targets to recoup their acquisition premium because the shareholders of publicly held targets can take advantage of a competitive market for corporate control. In contrast, privately held targets have lower bargaining power because they are traded on a less efficient market and suffer from a higher liquidity discount. Furthermore, it is often the case that the owners of private firms want to sell their firm due to the lack of human or financial resources. Our review on the existing empirical evidence is largely consistent with our propositions, which are summarized in Fig. 1.

NOTES 1. Corporate takeovers can also allow acquirers to increase market power. We do not address the issues involved in this socially and legally inefficient type of acquisition in this paper. 2. In an LBO, an investor group allies with management to borrow money and take the company private. Managers then have a higher incentive to maximize the value of the firm because they have substantial equity stakes. Investors usually represent the majority of a board of directors and closely monitor and govern the company. Finally, the high debt incurred in LBOs reduces the free cash flows of a company and exerts strong financial discipline on company management.


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3. Please note that, in the context of this chapter, we do not address restructuring opportunities of private-held firms that would stem from their lack or lower level of professional management compared to public firms. We believe that it is mainly associated with a size factor. Bigger firms tend to be endowed with higher professional managers (with public targets being on average of greater size than private targets). 4. We define synergy as the increase in the merging firms’ competitive strengths and resulting cash flows beyond which the two companies are expected to accomplish independently (Seth, 1990; Sirower, 1997). 5. There are two main strands to the auction literature: private value auctions, where bidders know the value of the target to themselves with certainty, and common value auctions, where the value of the target is the same to everybody, but different bidders have different information about the value. 6. OTC is a security which is not traded on an exchange, usually due to an inability to meet listing requirements. For such securities, brockers negotiate directly with one another over computer networks and by phone, and their activities are monitored by the National Association of Securities Dealers.

ACKNOWLEDGMENTS The authors are grated to Pierre Chandon and Andrew Horncastle for their valuable comments on this paper.

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THE MANAGING EXECUTIVE IN POST-ACQUISITION MANAGEMENT Duncan Angwin INTRODUCTION Managing Executives occupy a pivotal role in the acquisition process. It is virtually inconceivable that major Merger and Acquisitions (M&As) could proceed without their personal sponsorship (Hayward & Hambrick, 1997). They are central to the negotiation and signing for such deals and it is these negotiations that raise questions over how the target company should be run post-acquisition, how it should be configured to fit within the newly expanded group and what sort of strategy may be appropriate for the future. Managing Executives embody their firm’s strategies and so are intimately connected with these issues of organisational fit and strategic rational. With negotiations focussed upon the future of their businesses and their personal places in corporate history, these contests can be very dramatic. The high stakes are evident in the substantial levels of acquired Managing Executive departure post-acquisition. Whilst we can observe that many acquired Managing Executives subsequently leave the enlarged firm, little evidence to date answers the question of why they have been retained or replaced? This chapter examines the Managing Executive of the acquired firm in the post-acquisition phase. It begins by giving examples of Managing Executives fighting publicly over the future of their businesses and then shows high turnover in the Managing Executive of the acquired company post-acquisition. Explanation for why a Managing Executive may be retained or replaced is found in their

Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 55–79 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03003-0

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prior organisational background in terms of whether they are drawn from inside or outside the acquired company. This affects their views on post-acquisition strategy and their abilities to carry out post-acquisition strategic change. These abilities in turn are influenced by the amount of social capital that they are able to accumulate and the social networks which they are in a position to use. The chapter then shows that there are a number of different ways in which acquired companies can be integrated. These different post-acquisition styles have implications for the appropriate type of Managing Executive. The extent to which the Insider/Outsider distinction can be associated with such different types of post-acquisition integration is examined and consistencies and ambivalences are identified. In making sense of the ambivalent results, elapsed time post-acquisition is seen as an important influence upon the use of different Managing Executive types for integration management. The chapter concludes with the observation that the backgrounds of Managing Executives do relate to their retention or loss, post-acquisition, and that there is a clear link between the Insider/Outsider distinction and several post-acquisition styles, although the relationship is more complex in some areas than others.

THE IMPORTANCE OF MANAGING EXECUTIVES IN M&A Managing Executives are central in negotiating large scale M&A and have significant influence upon the shape of the deal and its subsequent management. For instance in the merger talks that failed in the first instance, between Glaxo and SmithKline Beecham in 1998, the clash of personalities and views between Jan Leschly and Sir Richard Sykes were widely attributed for the merger not taking place. It was only after Jan Leschly’s departure that the merger took place. Clashes such as these can result from a myriad of differences of opinion, ranging from firm level issues to personal concerns such as the details of Managing Executive compensation and future role in the new organisation. The media often amplifies clashes between these corporate titans by bestowing on them heroic or villainous qualities (Chen & Meindl, 1991). For instance, in the launch of the hostile takeover of Trust House Forte by Granada in 1995, Rocco Forte was portrayed at the outset as the villain by appearing as an aristocratic hobbyist presiding over a rather lacklustre group. On the other hand, his adversary, Gerald Robinson, was initially regarded as a hero who would soon improve the fortunes of the Forte group. This image was rooted in the superior prior performance of his company, Granada Group PLC that had consistently outperformed the FT All Share Index, and his own personal story of “rags to riches.”

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Underlying these bitter conflicts are struggles over how the M&A target may be configured, how it would be managed, what would be the appropriate strategy for it in the future and how it would perform. Pivotal to these issues is the role and nature of the Managing Executive charged with running the newly acquired company. For this reason, whether Managing Executives stay or go is of great importance to the future running of the acquired company. The high levels of Managing Executive turnover post-acquisition, reviewed below, raise important questions over the suitability of Managing Executives for post-acquisition management and ultimately post-acquisition performance.

HIGH LEVELS OF TOP EXECUTIVE TURNOVER Being acquired leads to significantly higher levels of Managing Executive change than in normal times (Walsh, 1988). This difference is most pronounced two years post-merger (Walsh & Ellwood, 1991) and in a study of the one hundred largest deals in the U.K. 1990–1994, only 43% of acquired Managing Executives remained in position two years post-takeover (Angwin, 1996). This is in line with other studies, which examined changes amongst all senior executives. Hayes (1979) showed 42% remaining five years post-acquisition whilst Hambrick and Cannella (1993) discovered that just 33% remained four years post acquisition. Walsh (1989) found the full effect of domestic acquisitions on Managing Executive turnover is not evident until the fourth year, and Krug and Hegarty (1997) report additional turnover effects in the fifth year for cross-border acquisitions, with just 25.2% of senior managers remaining in situ. In order to explain why there is such high turnover in Managing Executives, researchers have focussed upon two issues: (i) whether incumbent Managing Executives of acquired companies have presided over poor pre-acquisition performance; and (ii) whether the incumbent management, from the acquirer’s perspective, is able to manage a successful post-acquisition period. If incumbent Managing Executives have presided over poor pre-acquisition performance, acquiring managers may be better suited to running the target company and improve its performance. This can be thought of as a market based mechanism for “disciplining” poor incumbent management as alternative managers compete for the right to manage corporate resources (Jensen, 1988). Evidence in support of this corporate control theory, a disciplinary force for under-performing acquired management executives, has been hard to find. Walsh and Ellwood’s (1991) study showed that, rather than high levels of turnover being associated with the removal of “entrenched” or managerial “deadwood,” the managers departing early were more likely to be from the best performing

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companies. A further difficulty may be the use of the term “under-performing” which can range from companies that are in a serious financial condition through to those that may be profitable, increasing profits and even experiencing a rising share price, but are perceived to be performing less well than other comparators. A more limited interpretation of the term “under-performance” however, which focuses upon companies in very poor financial health, may support corporate control theory as disciplinary action upon top management (Angwin, 2004a). The issue of whether the acquired incumbent Managing Executive is able to manage a successful post-acquisition period is hard to assess as there are considerable difficulties in relating pre-acquisition intentions to post-acquisition actions (Angwin, 2000; Angwin et al., 1995). There are many reasons for this situation, including the distorting effects of the acquisition process (Jemison & Sitkin, 1986), significant differences between publicly stated aims and organisational reality in terms of intentions, capabilities for action, and contextual influences (Angwin, 2003). Rather than engage with what Managing Executives have actually practiced post-acquisition, studies have attempted to assess the appropriateness of turnover by focussing upon a posterori organisational performance outcomes. However, the results from extant studies are far from clear. In a study of 96 acquisitions Cannella and Hambrick (1993) have shown that the departure of senior executives affects company performance negatively and this view has been supported by Krishnan, Miller and Judge’s (1997) examination of 147 acquisitions where they found that top management team turnover is negatively related to post-acquisition performance. Anslinger, Copeland and Thomas (1996, p. 130) also support the position, that retaining senior executives is beneficial, by showing that pre-acquisition managers were kept in nearly 85% of the 829 acquisitions made by 21 successful acquirers. McCann and Gilkey (1988) on the other hand, in their study of Allied-Signal Corporation, supplemented with detail on eight other acquisitions, argue that “comprehensive changes in top management are often crucial for acquisition success.” We can add studies from related fields, such as turnaround management, which also observe Managing Executive succession leading to significant changes in companies (cf. Hofer, 1980). “Most turnaround situations require a new chief manager, since inadequate top management is the single most important factor leading to decline and stagnation” (Slatter, 1984). New Managing Executives were required in 73% of Bibeault’s (1982) successful turnarounds, 87% of Slatter’s (1984) and 65% of Grinyer, Mayes and McKiernan’s (1988). Whilst we can observe that there are very high levels of turnover amongst acquired Managing Executives, there is lack of agreement over the organisational performance implications of such changes and little is known of the impact such turnover may have on the acquired companies themselves. Only a few studies


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have examined this, focusing upon the Human Resource implications of employee retention (Hayes & Hoag, 1974) managerial career development (Gaertner, 1986), and minimizing post-acquisition upheaval and trauma (Buono & Bowditch, 1989; Marks & Mirvis, 1985). Implicit in these studies is disruption through culture clash as a negative force upon acquired companies, as employees will be lost. The high turnover in Managing Executives post-acquisition is evidence of differences in opinion over the post-acquisition organisational strategy of the acquired company. Clearly Managing Executives make a substantial difference to the strategy of their businesses (Wiersema, 1992) and their role is important for re-establishing strategic leadership (Shrivastava, 1986) and a key influence upon performance (Kitching, 1967; McCann & Gilkey, 1988; Schweiger, Ivancevich & Power, 1987; Siehl & Smith, 1990). However to date there is a lack of agreement over Managing Executive succession and organisational performance. To begin to tackle this question we must take a closer look at what Managing Executives actually do, or are expected to do in the newly acquired company. This involves linking different types of managing executive to subsequent organisational change.

INSIDERS/OUTSIDERS AND ORGANISATIONAL CHANGE Managing Executives can be distinguished by whether they are brought in from outside the acquired company or are retained incumbents. In this sense they can be characterised as being either Organisational Outsiders (Outsiders) or Organisational Insiders (Insiders). This distinction resonates with a substantial literature linking Managing Executive change with subsequent organisational change. This literature stream shows consistently that Outsiders tend to make more organisational changes than Insiders (Carlson, 1962; Grusky, 1960; Helmich, 1971; Helmich & Brown, 1972). This link is well illustrated in the turnaround literature: “often managers recruited from outside the organisation are necessary to achieve the changes required for a turnaround, as Insiders are reluctant to impose radical change” (Whittington, 1993, p. 122). Explanations for differences in the volume of change associated with the use of Insiders and Outsiders can be found in the prior organisational background of the Managing Executive. This affects cognitive perspectives, which in turn impact upon all aspects of the strategic decision-making process (Cyert & March, 1963; Walsh, 1988). Time spent within an organisation can confine an executive’s knowledge base (Cyert & March, 1963) and there is evidence that over time, organisational tenure is likely to lead to conformity to organisational values and norms (Kanter, 1977). On this basis, Insiders are more likely to be committed to

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the situation as it stands and be rather reluctant to embrace new strategies than are Outsiders (Hambrick & Mason, 1984). The pressure for self-justification and maintaining consistency with past behaviour will serve to re-enforce the status quo. Outsiders, on the other hand, have far less familiarity with their new company and will tend to bring a new perspective to bear. They are less committed to the status quo and do not suffer the same ties. For these cognitive reasons, Outsiders are linked with greater levels of organisational change than Insiders. This polarisation of perspectives can be accentuated by adverse selection (Wiersema, 1992). The principal’s fuller knowledge of Insiders will support their ability to continue to maintain the status quo. However, when seeking strategic change the Outsider, despite limited information disclosure, may be favoured, and the Insider’s ability to carry out change, overlooked. The organisational background of the Managing Executive and their mandate for the acquired company therefore tend to work hand in hand. Whilst the organisational background of the Managing Executive explains why Outsiders may make more organisational changes than Insiders, the way in which organisational changes are brought about is explained by how much social capital they possess. Social capital is created from social relationships (Loury, 1987), which can be used by persons to achieve their goals (Lin, 1988). Personal social capital is the ability to draw on social standing to influence the actions of others (Coleman, 1990). The resources used in the formation of such social capital are obligations, expectations and trustworthiness and these facilitate actions in different circumstances. Individuals in social settings with high levels of these resources, for instance as obligations outstanding, have greater social capital for facilitating action (Coleman, 1990). The social capital accruing to the Managing Executive may occur along three interrelated dimensions of structural embeddedness, such as impersonal linkages, relational embeddedness, which describes the depth of personal relationships, and a cognitive dimension of shared meanings. The way one is embedded in an organisation, as a web of social relations that provide information and political support (Brass, 1994), is critical for bringing about change as a web of relationships constitutes an essential resource for the conduct of social affairs and increases the efficiency of action (Nahapiet & Ghoshal, 1998). The social network then is an important mechanism for generating social capital. Its positive effect is building relationship cohesion and coherence and maintaining the status quo, which allows reciprocity to be amplified, the normative environment and trust to be secured, and cooperation fostered (Coleman, 1990, p. 313). Greater embeddedness in the social network enhances the Managing Executive’s social capital and the ability to make organisational changes. In the context of Insiders and Outsiders, greater embeddedness gives greater social


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capital and thus the ability to bring about organisational changes. However, such social networks may also hinder as well as facilitate certain actions. Social systems favour stability over change and coherence over dissonance as the integrity of a system depends upon the ties between the members (Zucker, 1977). Strong norms and mutual identification may lead to group-think (Janis, 1972), where the group becomes limited in its openness to alterative actions and information. The Managing Executive may also find difficulty in adapting, due to the rigidity of his interdependencies, which carry inertia of obligations to maintain relationships. Gulati (1998) picks up this theme in his review of network literature, by identifying contagion. This attempts to describe how structures can draw actors and organizations together such that one’s ideas and behaviours are contagious for each other. In the case of cohesion contagion, organizations and actors may be close in the sense that they are emotionally close. Behavioural conformity will be promoted as cohesively tied actors will develop shared understandings of the utility of certain behaviours, and this will influence their actions. For Insiders and Outsiders in the post-acquisition phase, the former would be subject to contagion whereas the latter would be less susceptible. In terms of organisational change, social capital and social network theories offer something of a paradox. Insiders have greater social capital by being more embedded in the social context than Outsiders and are therefore in a stronger position to bring about organisational change. However, Insiders are also constrained in making changes by their social embeddedness and network contagion. Outsiders on the other hand are not embedded in social ties to the same extent and do not share the same cognitive set of meanings. Although they can consider more radical change, social capital theory suggests they do not have the same level of social capital as Insiders to influence action.

LINKING INSIDERS AND OUTSIDERS TO POST-ACQUISITION CHANGE Volume of Change Statistical evidence from a survey of acquisitions in the U.K. during a five year period in the 1990s (Angwin, 1999) supports the view that Outsiders initiate more post-acquisition changes, in aggregate and by function, than Insiders. The reasons are that Outsiders often have a mandate for change, which is the basis upon which they have been recruited. As a new broom, Outsiders may need to be seen to take charge. In other words there is an expectation of change both from above and below. The Outsider is free of personal allegiances in the acquired company and

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is arguably less restricted in his ability to take action. “As an Outsider you can stand back and see things, often clearer, in a visionary strategic sense. You have the advantage of being totally objective, without personal allegiances.”1 When Outsiders do make changes, they do so on a much greater scale than Insiders. “I think we felt the changes were pretty substantial and it needed a new person to implement them – new blood to implement them. If the management had just stayed the same, although they bought into the changes, I think they would have found it very difficult when push came to shove, to actually do it.” Keeping the Insider in post is often seen as a vote of confidence in the way the acquired company had been managed prior to acquisition and so the takeover itself is much less a driver for change. “They (the acquirer) didn’t interfere with the business. They just let me run the company. There wasn’t that much to change cause it (the acquired business) was very successful and even now it’s still going along the same track. There was nothing for them to do, so they were quite happy.” For Insiders, the budget agreed with the acquirer was a bible and, provided targets were met, they were left to carry on as they thought fit with minimal parental interference. Indeed Insiders often guarded their independence fiercely. “I have found my major role throughout was defending the business from the owners.” The extent to which the Insiders maintain the status quo in the acquired company is apparent. This supports the explanation that the prior organisational background of the Managing Executive is an important determinant of subsequent organisational change. Organisational values and norms, prior strategies, allegiances and ties, act to constrain the Insider in making changes. The Outsider in contrast does not suffer these ties to the same extent. The relationship between organisational change and Insiders/Outsiders remains consistent across variations in definition. Insiders may not only include the incumbent Managing Executive but also a new executive drawn from within the acquired firm. Outsiders may include Managing Executives drawn from the acquiring company, from the same industry or from different industries. Figure 1 shows a statistically significant negative relationship between increasing levels of post-acquisition change and the embeddedness of the Managing Executive. The weaker the constraining ties and allegiances, the greater the freedom to make changes. New Managing Executives drawn from within the target firm may have some of the social ties of the incumbent but are less wedded to the status quo. New Managing Executives drawn from the same industries, are not embedded in the social networks of the acquired company and have broader perspectives than Managing Executives, both incumbent and new insider, in the acquired firm. However, they may be “bounded” by industry rationality. Those Managing


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Fig. 1. Insiders and Outsiders Compared on Volume of Change Post-acquisition. Source: Angwin (1999).

Executives brought in from outside the industry carry out even greater levels of organisational change in the acquired company and have broader perspectives than the other Managing Executive types.

SPEED OF POST-ACQUISITION CHANGE Whilst Outsiders make more changes than Insiders, when it comes to the speed with which changes are made, Insiders act more rapidly (Angwin, 2000, 2004a). The picture however is not as clearly defined as with the volume of change. Whilst Insiders act more rapidly overall, their speed is concentrated in certain functional areas such as Finance, Operations and Communications. The picture for functions such as Human Resource issues is mixed, and in Marketing and I. T., Outsiders tend to act more rapidly. Reasons why Insiders act more rapidly than Outsiders are that Insiders are far more familiar with their companies than Outsiders who need time to build a picture. “We broadly knew what to do but not enough to go in there and do it on day 1.” Indeed in some cases the Outsider was not informed of his new appointment

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until a day or so before the acquisition happened! This may be born out by the clear difference in speed in terms of changing internal operations. Several Outsiders also stated that they “went into the acquisition with an open mind.” Insiders often made changes they had been planning to carry out for a long time, but needed an excuse. In one instance an incumbent Managing Executive wanted to remove a poorly performing finance director, who was also a substantial shareholder. This was not possible until there was a change in control. In the words of another Insider, “it helps to be able to pin redundancy decisions upon the acquiring company’s personnel department in Head Office.” There is also an argument that the Insider does not take his eye off the commercial football to the same extent as an Outsider who first has to learn about the business. On this basis the Insider may be more responsive to changes in the market. “We were making changes because I thought it was appropriate to make changes. I continually change an organisation, it’s never static.” However negotiating a deal does absorb a great deal of senior management time so that the retained Insider often feels once the deal is completed that he has to get back into the saddle. “The business had suffered from me being out of involvement (whilst) I tried to sell it. I had to get re-involved. Because I had more time to spend on the business I was able to identify what needed doing next and to drive it forward, which I had not sufficient time to do in the past.” Insiders already possess social capital and cohesive working social networks in the acquired firm, which are key to implementing agendas and bringing about change at the outset of the post-acquisition period. The Organisational Outsider on the other hand needs time to build social capital and construct networks. Although the next quotation is more about which managers to remove or keep, it gives a flavour of the in-built delay in action as well as the need to create some sort of interface. “We needed to spend five months establishing exactly who the right people were. We knew broadly the structure we wanted, but needed to create some interface between the organisations to allow us to start the planning process.” Whilst the Outsider may have timely information, he needs at the outset to secure cooperative behaviour whilst the Insider is already in a strong position to act. Based upon the volume and speed with which post-acquisition change is initiated, Managing Executive prior backgrounds, levels of social capital and embeddedness in social networks can be seen to have a differential effect. The social capital resulting from a profound understanding of the acquired company and embeddedness in a network of working allegiances, is clearly instrumental in allowing the incumbent Managing Executive to bring about rapid change. However, this embeddedness also works to restrict the amount of change initiated. Conversely Outsiders, with less social capital and lacking immediate working networks in the acquired company, have fewer restrictions upon the volume


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of changes they intend to make but have fewer mechanisms to allow them to act quickly. With considerable support for the dichotomisation of Managing Executives into Insiders and Outsiders, based upon the volume of post-acquisition change, and some evidence to support a distinction based upon speed of action, we can examine their use in different post-acquisition integration styles.

POST-ACQUISITION INTEGRATION STYLES Whilst a number of post-acquisition typologies exist, the majority aim at identifying cultural differences between merging firms (Cartwright & Cooper, 1996; Nahavandi & Malekzadeh, 1988). Few focus upon the “holy grail” of acquisition studies, namely linking strategic fit with organisational fit to achieve post-acquisition integration styles. One well-known conceptual framework by Haspeslagh and Jemison (1991) has attempted to address this issue. The basis for Haspeslagh and Jemison’s (1991) styles is two key dimensions of need for strategic interdependence and need for organisational autonomy. The need for strategic interdependence is the way in which value is expected to be created (Haspeslagh & Jemison, 1991, p. 139) and may be linked to the concept of strategic fit. The need for organisational autonomy is the extent to which the strategic capabilities of the acquired company need to be preserved (Haspeslagh & Jemison, 1991, p. 139) and can be linked to the concept of organisational fit (Fig. 2). Haspeslagh and Jemison’s (1991) strategic interdependence axis makes a conceptual distinction between two ways in which an acquisition benefits the acquired firm. One way is through value capture, which they link with a financial asset or capital markets perspective of short-term transaction gains. The other is through value creation, a longer-term phenomenon resulting from managerial actions to exploit valuable synergies between the firms. For Haspeslagh and Jemison (1987, p. 54; 1991, p. 22), value capture is generally a one time, transaction related, event involving shifting value from previous shareholders/stakeholders to the acquiring firm’s stakeholders. This is frequently a financial gain, which may be manifested in a number of ways, such as getting a good price in the market (Bowman & Ambrosini, 2000; Wernerfelt, 1984), where companies may be undervalued. This may be because the acquiring managers have better information about the target than the stock market (Ravenscraft & Scherer, 1987) and bidders may have unique information about combination benefits. There is widespread evidence for valuation theory as a motive for acquisition, with acquirers justifying their actions in terms of having better private information than the markets (Trautwein, 1990). Other financial gains may be; reaping substantial

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Fig. 2. Types of Acquisition Integration Approaches. Source: Haspeslagh and Jemison (1991, p. 145). (Reprinted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Managing Acquisitions: Creating Value Through Corporate Renewal by Philippe C. Haspeslagh and David B. Jemison. Copyright © 1990 by The Free Press. All rights reserved.)

savings or reductions of tax liabilities;2 adjusting the debt profile of the acquired company;3 asset stripping (Haspeslagh & Jemison, 1991) and where acquirers borrow against the cash balances of the target company. The seller, future owners, the Government and existing creditors are common sources of value capture. In classifying the benefits that accrue to acquisitions, Haspeslagh and Jemison (1991) identify combination benefits as not requiring formal capability transfers between the organisations. On this basis they may also be seen as types of value capture, where there is potential value purely in the ownership. These include enhanced power along the value chain with suppliers, customers and distribution channels as well as greater power over smaller competitors. Acquisitions can also be used to achieve collusive synergies (Chatterjee, 1986) where potential entrants to an industry are deterred by the potential competition (Steiner, 1975) of concentric acquisition by a market leader, or mutual forbearance (Porter, 1985) by acquiring in a competitors’ main market. These synergies represent wealth transfers from the firms’ customers (Trautwein, 1990). Greater size may lower financing costs and increase borrowing potential and may even increase stature


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and reputation. Greater diversity may improve stability of earnings and reduce portfolio risk (Haspeslagh & Jemison, 1991). All of these may serve to enhance share price. The other way of adding value to the acquirer is through value creation. For Haspeslagh and Jemison (1991, p. 22) value creation is a longer term phenomenon that results from managerial action and interactions between firms. They conceive of these interactions as being capability transfer between both firms to create value that would not exist if the firms operated separately (Haspeslagh & Jemison, 1991, p. 139).4 They classify these types of capability transfer as resource sharing, functional skills transfer and general management capability transfer and believe that for any one acquisition, one of these types of transfer is likely to be dominant. This capabilities perspective stems from the Resource Based View of the firm (Barney, 1986; Dierickx & Cool, 1989; Penrose, 1959; Wernerfelt, 1984) where firms consist of idiosyncratic costly-to-copy capabilities the exploitation of which may give a competitive advantage. Firms then can be viewed as a bundle of capabilities, which are immobile, valuable, rare and difficult to imitate or substitute (Barney, 1991) in a highly imperfect market. Such firms may well become acquisition targets as they offer the potential for acquirers to achieve above-normal economic profits through exploiting valuable, rare and private synergies between both firms. For synergetic interaction to take place, managerial action to effect transfer of valuable capabilities is required. However, this raises a critical issue concerning the embeddedness of the capabilities. Whilst valuable capabilities in the firm may be immobile in so far as there is no satisfactory market mechanism for them to be traded, such as customer relationships, sense of loyalty to the firm (Dierickx & Cool, 1989), or the transaction costs may be too high (Williamson, 1975), once the firm is acquired some of these capabilities may be less immobile depending upon the extent to which they are embedded in an organisational culture. Where immobile and inimitable capabilities are likely to be bound to the organisational culture, such as those which are socially complex and with a strong tacit dimension (Dierickx & Cool, 1989), any separation of these capabilities from cultural context is likely to destroy the very capability the acquisition was designed to acquire. Capability transfer has implications for the extent to which the boundary of the acquired organisation will be disturbed and its identity maintained. Haspeslagh and Jemison (1991) recognise the importance of boundary protection in using the concept of autonomy in their framework. Autonomy is a central concept of organisational fit, where organisational behaviour and corporate culture research has focused upon the disruptive impact of acquisitions on people (Buono & Bowditch, 1989; Marks & Mirvis, 1985; Nahavandi & Malekzadeh, 1988; Schweiger & Walsh, 1990). Haspeslagh and

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Jemison (1991, p. 143) use the need for autonomy to reflect whether the survival of the strategic capabilities, upon which the acquisition is based, depends on preserving the acquired company’s organisational culture. Recognising the need for autonomy acknowledges the importance of protecting an acquisition from incursions by the parent intent on realising synergies. This raises a paradox, that there may be valuable immobile capabilities embedded in an acquired company’s culture and yet there is a strategic need to realise synergies through transferring capabilities. Haspeslagh and Jemison (1991) reconcile this paradox by suggesting that autonomy is critical at the outset to protect the acquired capabilities but over time, both organisations can work toward a new organisational and cultural solution. For their focus upon strategic acquisitions, a processual dynamic of Symbiotic acquisitions is necessary to overcome the paradox of needing to maintain acquired capabilities and yet create value through capability transfer.5

POST ACQUISITION INTEGRATION STYLES AND THE MANAGING EXECUTIVE The role of the Managing Executive is not a central concern of Resource Based View theorists who focus upon competencies is rooted in the essence of an organization (Mintzberg & Lampel, 1999). However, the Managing Executive is an integral part of the distinctive competencies of the acquired company. Whether the acquisition is to be perceived as captured value, and left intact or, as a value creation opportunity, and therefore subject to restructuring, the Managing Executive will play an important role in bringing about or resisting change. Only the study by Siehl and Smith (1990) has examined Managing Executive retention for different post-acquisition situations, which they characterise in Human Resource terms. They identify four strategies based on interpersonal relations of Pillage and Plunder, One Night Stand, Courtship/Just Friends, Love and Marriage. Pillage and Plunder is portrayed as zero integration of standalone turnarounds where it is undesirable to retain Managing Executives who will have under-performed, or manage assets to be broken up, sold off or bolted on. In One Night Stand and Courtship, there is increased integration and Managing Executives should remain, having an expertise lacking in the parent firm. In the later case Managing Executives are important for progressive organisational integration. Love and Marriage represents complete integration but with a paradox: the considerable need for integration would be facilitated by Managing Executive retention, but they may become unnecessary as the de-duplicating process proceeds. Although not made explicit, Siehl and Smith’s (1990) typology appears to lie upon a single dimension ranging from none to complete organisational integration.


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The marital analogy suggests that this dimension is personal autonomy and that this discriminates between Managing Executive types. We need to treat their work with care however as it is based on just four cases with a typology derived from marital analogy rather than firm characteristics. It is also not clear that their categories are really mutually exclusive. Nevertheless, their styles do provide some suggestions for the retention of replacement of acquired Managing Executives. Haspeslagh and Jemison’s (1991) framework is more rigorous and firm centric and we shall remain with it to examine the relationship between Managing Executive type and their two key underlying dimensions of autonomy and strategic interdependence.

POST-ACQUISITION AUTONOMY AND THE MANAGING EXECUTIVE Organisational autonomy for the newly acquired company is linked to the need to protect the source of strategic capabilities (Haspeslagh & Farquhar, 1994, p. 429). It has been observed that with increasing autonomy, the level of changes to the acquired company reduces (Angwin, 1999). Increasing autonomy allows a growing tolerance of corporate differences and increases the likelihood of the incumbent managing executive remaining. Some evidence for this is contained in the widely cited study by Hayes and Hoag (1974) who observe that autonomy may be negatively6 associated with top management turnover and Weber and Schweiger’s (1989)7 study, which suggests that autonomy is linked to Managing Executive retention. To preserve the acquired company’s core competencies the incumbent Managing Executive or Organisational Insider is likely to be retained. The appointment of an Outsider is unlikely as it may have a disruptive effect. If high organisational autonomy is linked to preserving the status quo and the use of Insiders, then low organisational autonomy should be associated with post-acquisition change and the use of Outsiders. Under these circumstances, there will be little desire to maintain the core competencies of the acquired company in its unique configuration and we might surmise that the acquirer will impose its own strategic view. A new Managing Executive from outside the acquired company is likely to be introduced for new perspectives and to legitimise change. As mentioned earlier, they would be less constrained than their Insider counterparts who are embedded in existing social systems (Pfeffer, 1977) and subject to an “organizational inertia.” This lack of ties would give them greater discretion to take action in managing structural and procedural impediments to change. In situations of low organisational autonomy, Insiders would represent the old order and would, themselves, be an obstacle to change.

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In terms of organisational autonomy, high levels of autonomy are associated with maintaining the characteristics and strategy of the acquired company and Insiders are likely to be in place. Low levels of autonomy however suggest that the acquirer believes that the acquired company’s strategy is sub-optimal and that there should be significant change. In this circumstance Outsiders may be more appropriate. The evidence however is not as clearly in support as the argumentation would suggest. In reviewing acquisitions during the 1990s, Angwin (1999, 2004b) showed that there was only weak statistical support for an overall relationship between autonomy and the use of Insiders or Outsiders. However, the relationship was supported where there were high levels of autonomy, with statistically higher than expected levels of Insiders and lower than expected levels of Outsiders present. The prevalence of Insiders in acquired companies with high autonomy was articulated by Insider Managing Executives who suggested new owners lacked in-situ experience and needed to keep management expertise. “They are buying a good management team.” “Without the (target) management they were going to be a bit adrift.” The positive association between Insiders and high autonomy is consistent with maintaining the core competencies of the acquired company of which the Managing Executive is an integral part. As the level of autonomy reduced, the usage of Insiders also falls but not as far as might be expected. This is a paradox as low autonomy suggests the acquired company’s configuration is not highly valued and will be changed, and yet the incumbent who represents the status quo, stays. A further indicator of the likelihood of change in these low autonomy acquisitions is that many exhibited poor financial health prior to acquisition. Nevertheless many Insiders remained to carry out rapid changes dictated by the new parent. In the words of one Insider, “I had been thinking about it for months and I had got a blueprint already in place and I just pressed the button.” Indeed the change in Insider’s self esteem, as a result of being commanded from above to make severe changes to the business, is well brought out in this Insider’s further comment, “I had a futile role as Managing Director.” These changes were often regarded as putting a red line though previous strategy, and the Managing Executive’s role was perceived to change from a strategic to a purely operational one. For low autonomy, the presence of Insiders is problematic as the acquired company’s configuration is less valuable and high levels of change anticipate the use of Outsiders. However, if speed of change is a priority, Insiders may remain as they act faster than Outsiders (Angwin, 1999, 2004a). Through their current ties and alliances, Insiders are better positioned to carry out change rapidly, as Outsiders need time to set up such networks. Reducing the level of autonomy had little effect upon the use of Outsiders. This is hard to explain except to say that acquirers may find setting levels of autonomy


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difficult (Wensley & Angwin, 1996) and they may also be over confident in the ability of their new Outsider management to take charge from incumbents. In situations of high autonomy this may be an error.

POST-ACQUISITION STRATEGIC INTERDEPENDENCE AND THE MANAGING EXECUTIVE The greater the interdependence between acquired and acquiring companies, the more substantial the change in the former company, as such transfers and sharing are inimitable to the preservation of the unique configuration of the acquired company’s capabilities and competencies. As the incumbent Managing Executive of the acquired company is highly associated with his company’s strategy and unique configuration of competencies, the erosion of these by substantial resource transfer or sharing, is likely to make him less valuable to the acquirer. His unique value, stemming from embeddedness in the acquired company’s social structure will wane as his company’s coherence fades. Necessary for strategic interdependence is managerial action to bring about synergetic gains between the two companies. This managerial competence is more likely to reside in a new Managing Executive drawn from the acquiring company than an acquired incumbent. The Outsider will be aware of the conditions into which the acquired company needs to be merged and will be closer to the parent board from the outset. The Outsider can focus objectively upon the synergies to be created, will not be tied to the previous way of doing things, and may be better able to overcome organisational resistance in the acquired company. This is not to say that Insiders cannot begin to bring about synergetic interaction between both companies, but this may be only in a very limited way, as in so doing, they may undermine their own distinctive value as social ties and organisational values dissipate. As mentioned earlier there may also be a selection bias against them for integration (Wiersema, 1992). Where there is low resource transfer or sharing intended, the need for interorganisational managerial skills will be far less and greater value placed upon the acquired company being run effectively. For this reason Insiders are likely to be retained and, for the reasons of selection bias mentioned above, Outsiders would be perceived to be an unnecessarily disruptive force. In examining acquisitions made in the U.K. during the 1990s, Angwin (1999, 2004b) found that there is a statistically significant positive relationship between the presence of Outsiders and strategic interdependency and a negative one with the use of Insiders. In high strategic interdependence situations, this may be explained

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in terms of the “conquering army syndrome,” where everything the acquired company stands for is seen as outmoded and to be replaced with superior parent capabilities. “We were pretty successful and had a winning formula. We knew we were doing it right and that everybody else did it wrong, so we just imposed our culture totally on the target. We knew the business. Their business was our business. We were just going to get in and swallow it and absorb it. It does focus the mind and you haven’t got to have a debate about which computer system is best – you just go in and shut theirs down and transfer your own.” In addition with the sharing of capabilities there is often scope for de-duplication of capabilities. At the senior management level certain positions, such as company secretary of the acquired business, are often seen as unnecessary. “We didn’t need a board of directors of a Plc as we are a Plc and ten times their size. We didn’t want a board of directors floating around.” In situations of low strategic interdependence, Insiders remarked upon a lack of direction from the parent and “a lack of understanding of what they had bought and why they had bought it.” “The owners contribute absolutely nothing to the business at any stage.” Whilst the frustration and confusion amongst Insiders over low strategic Interdependency is tangible, it is understandable in financial asset terms. Such acquisitions are value capture deals where value is gained through the market rather than internally through exchange. Insiders will remain therefore as the acquired business will not integrate with the new parent. The high strategic interdependency acquisitions witness significant change and interaction to create value through internal synergies. The use of Outsiders in this context, to bring fresh insight and carry out substantial change, is consistent with this approach.

MAPPING INSIDERS/OUTSIDERS ONTO POST-ACQUISITION INTEGRATION STYLES By putting the two dimensions of autonomy and strategic interdependence together, along the lines of Haspeslagh and Jemison’s (1991) contingency framework, we can locate our Insiders/Outsiders in different post-acquisition styles (Fig. 3). We have already seen that there are consistencies between Insiders, high levels of autonomy and low levels of strategic interdependence, which would also suggest low levels of organisational change. Similarly, Outsiders, low autonomy and low strategic interdependency show consistency and suggest high levels of change. Figure 3 shows these consistencies in Preservation and Absorption integration styles. From a Resource Based View the use of Insiders in Preservation acquisitions is clearly a case of value capture, where the unique configuration of the acquired company, including its incumbent manager, is highly valued. Incumbents remain


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Fig. 3. Mapping Insiders and Outsiders Onto Post-acquisition Styles. Source: Angwin (1999).

in place to maintain what is valued – the status quo. The use of Outsiders in Absorption acquisitions creates value through realising inter-organisational synergies. These are achieved through restructuring the acquired company to integrate fully with the new parent. This interaction, to exploit valuable synergies between the companies, disrupts the boundary of the acquisition. In this situation, Outsiders are appropriate for a new worldview and for substantial reconfiguration in the acquired business. For the two other acquisition styles, Holding and Symbiotic styles, there is clearly something of a conflict between the relative importance of the dimensions and manager type. In Holding acquisitions, low autonomy suggests high change and yet low strategic interdependence suggests little change. The high levels of change recorded suggest the use of Outsiders and yet Insiders dominate. Reasons are that Holding acquisitions are often turnaround situations requiring rapid action. Insiders are already embedded in effective social networks for bringing about changes quickly, unlike Outsiders (Angwin, 2000, 2004a). The acquisitions are also held at arms length from the parent company so that the changes are largely internal rather than at the boundary. This suggests that the strategic interdependency axis has greater influence than autonomy on Managing Executive type in instances of poor performing companies. For Symbiotic acquisitions high strategic interdependence suggests high levels of inter-organisational change whilst high autonomy predicts preservation of

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the status quo. In fact the proportions of Outsiders and Insiders does not give a clear indication of which axis may dominate. However, when the amount of time elapsed since acquisition is taken into account, Insiders dominate the first 18 months (75% Insiders) and Outsiders thereafter (100% Outsiders) (Angwin, 2004b). It would seem that Insiders are used initially to stabilise and maintain the acquired company, so that its valuable configuration is not lost, and then Outsiders are employed for more radical inter-organisational change. This would seem to resolve the paradox with Insiders as the most apposite Managing Executive type for maintaining the status quo and Outsiders bringing fresh perspectives and more fundamental change. At the outset then, autonomy constraints are the key determinant of Managing Executive type in Symbiotic acquisitions. Later these constraints are supplanted by the effects of strategic interdependence intentions. Autonomy represents initial perceived constraints upon integration whereas strategic interdependency represents longer term integration aspirations. The dimension of strategic interdependence is broadly consistent with the deployment of Insiders and Outsiders in Holding and Symbiotic acquisitions. For Holding acquisitions, the value of the acquisition will have been obtained through the market by purchasing a bargain. As there is little intention to extract inter-group synergies, often as there is concern that their condition may infect the group, changes to the acquired company will take place in isolation and within its own frame of reference. For this purpose the Insider is well equipped to act. For Symbiotic acquisitions, creating value through mutual restructuring and realising inter-group synergies favours an Outsider’s fresh perspective, with his broader information base and lack of allegiances (Angwin, 2004b). The strong association between Managing Executive type and Strategic Interdependence and weak association with autonomy, suggests that decisions over top management type are more a reflection of “intentions over constraints” and “possibilities over limitations.” In establishing which Managing Executive to use, the distinction between value capture and value creation is of key importance, so that in the former, where low integration is anticipated, the Insider will remain, and in the latter, the Outsider will dominate. The Autonomy dimension whilst having an effect is clearly not well understood.

CONCLUSIONS Many acquisition studies have pointed to the importance of top management in the acquired company during the post-acquisition phase. However high turnover in Managing Executives and inconclusive results, relating retention or replacement to acquisition performance, has raised the issue of the link between Managing


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Executive and subsequent post-acquisition organisational change. In this chapter we have addressed this by drawing upon the Insider/Outsider debate and shown that there are significant differences, in the post-acquisition context, between these Managing Executive types, in terms of the volume and speed of change. We have also shown that the simple organisational Insider/Outsider dichotomy is part of a larger sequence related to organisational distance, with new Managing Executives making more changes the further removed they are from the acquired company. Managing Executives drawn from the acquirer make more changes than those from the acquired, and those from other industries make more changes than those from the same industry. This finding points to organisational distance as a useful refinement to the concept of Managing Executive prior background. Prior background, social capital, and social network theories have provided insight and explanation for the use of Insiders or Outsiders in terms of the role of ties, allegiances, prior strategies, and networks. However the literature is divided over the facilitating and constraining effects of these elements. In a post-acquisition context, we have shown that social embeddedness serves as a constraint upon Insiders in terms of volume of organisational change, whereas Outsiders have fewer restraints and bring fresh perspectives. In terms of speed of change however, the reverse is true. Insiders are able to act more rapidly because of their fully formed working networks and because they possess the necessary social capital to activate them. Outsiders, on the other hand, need time to build such networks and generate sufficient social capital to make them operative. Prior organisational background and social capital theories appear to offer differing viewpoints upon the ability of Insiders and Outsiders to bring about organisational change in a post-acquisition context. The former argues for the ability of the Outsider to make significantly more changes due to the lack of organisational constraints and the latter argues for the Insider having the power through social embeddedness to bring about change. This chapter suggests a resolution of these perspectives based upon the volume and timing of post-acquisition change. Outsiders’ broader informational perspectives and lack of restricting social ties and allegiances in the acquired company allow them to make more changes than Insiders. Insiders however, through their immediate high levels of social capital at the time of the acquisition and their deep embeddedness in the social architecture of the acquired company, are able to act more rapidly. This suggests that the use of Insiders or Outsiders can be related to the type of strategic change, or post-acquisition integration styles, for the acquired company. Insiders would move rapidly within a constrained set of options in continuing incremental organisational change, whereas Outsiders would pause to consider options before embarking on large-scale transformational change.

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The resonance of the Insider/Outsider distinction with levels of post-acquisition change allowed further comparison with the important post-acquisition variables of strategic interdependence and organisational autonomy. The chapter has shown empirical support for a consistent relationship between strategic interdependence and acquired Managing Executive type. This is broadly consistent with the distinction between value capture and value creation with Insiders predominating in the former and Outsiders in the latter. The association between organisational autonomy and Managing Executive is more problematic than earlier studies suggest (cf. Hayes & Hoag, 1974). Insider usage shows a negative association with autonomy whereas Outsiders appear unrelated. This lack of a straightforward relationship has led to suggestions that setting the levels of autonomy for the acquired company is difficult for managers to handle (Wensley & Angwin, 1996). In relating Insiders and Outsiders to specific post-acquisition integration styles, the chapter has shown that there are consistencies between predicted Managing Executive types and Preservation and Absorption acquisitions. However, Holding and Symbiotic acquisitions present paradoxes based upon the predictions derived from the levels of strategic interdependence and autonomy. The close link between Managing Executive type and strategic interdependence axis points to this being the dominant dimension of the framework, whereas the affect of autonomy is weak and inconsistent. This is most clearly seen in Symbiotic acquisitions where there appears to be a delay in changing from Insider to Outsider. The existence of differential timings of Managing Executive change suggests that further research could be carried out into the transitions and timings of handovers between different Managing Executive types. We may say then that in the post-acquisition period, decisions over Managing Executive type are more a reflection of the level of strategic interdependence rather than the level of autonomy. This shows a dominance of “intentions over constraints” and “possibilities over limitations” in establishing which Managing Executive type is used.

NOTES 1. All the quotations are taken from Managing Executives running acquisitions in the U.K. Names are not given to protect identities. 2. This maybe through judicious application of tax loss carryfowards from the target firm, tax treatment of goodwill, or other special tax treatment, and in leveraged acquisitions the transfer of value through reduction in the cost of capital base on the tax deductability of interest. 3. In turnarounds, higher risk debt may be renegotiated down by providing guarantees (Haspeslagh & Jemison, 1991).


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4. This capability transfer was anticipated by Porter (1987) in describing the transfer and sharing of skills, competencies and capabilities as a way of creating value in acquisitions. 5. It is worth observing that the existence of this paradox suggests, on conceptual grounds, that further development of this framework is possible. 6. There is however no evidence that statistical tests were performed in their study. 7. Managing Executive’s commitment to the acquiring organisation and the acquisition is positively correlated with autonomy.

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Loury, G. (1987). Why should we care about group inequality? Social Philosophy and Policy, 5, 249–271. Marks, M., & Mirvis, P. (1985). Merger syndrome: Stress and uncertainty. Mergers and Acquisitions, 82, 38–44. McCann, J. E., & Gilkey, R. (1988). Joining forces: Creating and managing successful mergers and acquisitions. Englewood Cliffs, NJ: Prentice-Hall. Mintzberg, H., & Lampel, J. (1999). Reflecting on the strategy process. Sloan Management Review, 40(3), 21–30. Nahavandi, A., & Malekzadeh, A. R. (1988). Acculturation in mergers and acquisitions. Academy of Management Review, 13(1), 79–90. Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. The Academy of Management Review, 23(2), 242–266. Penrose, E. T. (1959). The theory and growth of the firm. New York: Wiley. Pfeffer, J. (1977). The ambiguity of leadership. Academy of Management Review, 2, 104–112. Porter, M. E. (1985). Competitive advantage. New York: Free Press. Porter, M. E. (1987, May/June). From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 43–60. Ravenscraft, D. J., & Scherer, F. M. (1987). Mergers, selloffs, and economic efficiency. Washington, DC: Brookings Institute. Schweiger, D. M., & Walsh, J. P. (1990). Mergers and acquisitions: An interdisciplinary view. Research in Personnel and Human Resources Management, 8, 41–107. Shrivastava (1986). Postmerger integration. Journal of Business Strategy, 7(1), 65–76. Siehl, C., & Smith, D. (1990). Avoiding the loss of a gain: Retaining managing executives in an acquisition. Human Capabilities Management, 29(2), 167–185. Slatter, S. (1984). Corporate recovery: A guide to turnaround management. London: Penguin Books. Steiner, P. O. (1975). Mergers: Motives, effects, policies. Ann Arbor, MI: University of Michigan Press. Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic Management Journal, 11, 283–295. Walsh, J. P. (1988). Top management turnover following mergers and acquisitions. Strategic Management Journal, 9(2), 173–183. Walsh, J. P. (1989). Doing a deal: Merger and acquisition negotiations and their impact upon target company top management turnover. Strategic Management Journal, 10(4), 307–322. Walsh, J. P., & Ellwood, J. W. (1991). Mergers, acquisitions and the pruning of managerial deadwood. Strategic Management Journal, 12, 201–217. Weber, Y., & Schweiger, D. M. (1989). Implementing mergers and acquisitions: The role of cultural differences and level of integration. Unpublished paper, College of business administration. University of South Carolina. Wensley, R., & Angwin, D. N. (1996). Autonomy in post-acquisition management. Presentation at the Rembrandt Hotel, London. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171–180. Whittington, R. (1993). What is strategy – and does it matter? London: Routledge. Wiersema, M. F. (1992). Strategic consequences of manager succession within diversified firms. Journal of Management Studies, 29(1), 73–94. Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. Zucker, L. G. (1977). The role of institutionalization in cultural persistence. American Sociological Review, 42, 726–743.

“IDEAL” ACQUISITION INTEGRATION APPROACHES IN RELATED ACQUISITIONS OF EQUALS: A TEST OF LONG-HELD BELIEFS Kimberly M. Ellis and Bruce T. Lamont INTRODUCTION Despite the recent slow down in overall activity, acquisitions continue to be a popular growth strategy used by firms competing in a globally competitive marketplace (Duck, Sirower & Dumas, 2002). At the same time, acquisitions are more of a complex phenomenon than ever in that the conditions under which they enhance or destroy firm value still remain unclear despite the wealth of acquisition studies in finance and management. In fact, recent studies by several major consulting and advisory services firms provide evidence that at a minimum one-third to one-half of these deals fail to achieve anticipated benefits, cost savings and other outcomes (KPMG, 1999; Mergerstat, 2000; PricewaterhouseCoopers, 2000). Even more alarming, the latest reports released by Booz Allen and Hamilton (2001) and BusinessWeek (Henry, 2002) indicate that this “failure” to deliver announced benefits and improvements in shareholder wealth increases to over 60% when examining large M&As which typically bring together two firms that not only compete in similar product or market domains but also have comparable size positions. Thus, the question lingers . . . What distinguishes


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KIMBERLY M. ELLIS AND BRUCE T. LAMONT

those acquisitions that are successful in meeting intended goals and performance improvements from those that are not successful? In an effort to increase our understanding of determinants of post-acquisition success, several papers based primarily on case studies of selected firms have focused on the acquisition process itself. These works address the long held notion that the ability to manage multiple elements of the integration process is a critical determinant of post-acquisition outcomes (Jemison & Sitkin, 1986; Kitching, 1967; Shrivastava, 1986). In essence, it has long been assumed that different types of acquisitions require different integration approaches that can be described as some number of ideal types or configurations of process elements. For example, Haspeslagh and Jemison (1991) identified three primary integration approaches and offered general guidelines necessary to effectively manage each of these approaches so as to create value in the combined firm. Others (Marks & Mirvis, 1998; Nahavandi & Malekzadeh, 1988) offer similar prescriptions. Given the widespread nature and longevity of these beliefs about the effective management of acquisition integration, it is surprising that empirical analysis of the integration process is still often overlooked in M&A research. Two notable exceptions include studies that examine the effect of task, cultural and political characteristics on the level of integration (Pablo, 1994) and link specific process elements, like communication and timing of changes, to post-acquisition success (Ranft, 1997). However, difficulty in obtaining primary data from a sufficient number of firms involved in integrating comparable acquisitions is an obvious obstacle to placing these long-held beliefs on even firmer empirical ground. Therefore, while the existing case evidence and prescriptive work has generated useful guidelines and hypotheses about the effective integration of acquisitions, their veracity and generalizability remain unknown. The purpose of this study is to test the implied configurations of process elements for different integration approaches hypothesized by Haspeslagh and Jemison (1991) and theorized to a lesser extent by Nahavandi and Malekzadeh (1988) as well as Marks and Mirvis (1998). The major process elements hypothesized to vary by approach and affect post-acquisition performance are procedural justice, target firm involvement, preliminary planning, transition management, and timing of changes. We limited our test to a particular type of acquisition, those involving similar-sized firms in related industries, to control for differences in type of acquisition while ensuring significant variation in integration approaches and post-acquisition performance effects. We find good support for an “ideal” configuration or method for implementing the Absorption and Transformation approaches, although not always as hypothesized. The contributions of our research rest on its focus on empirically analyzing the integration process, an area that has received very limited attention in existing M&A research. In doing, we

“Ideal” Acquisition Integration Approaches in Related Acquisitions of Equals

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provide evidence that not only does a configuration of multiple process elements influence post-acquisition performance but also the significance of specific process dimensions varies by integration approach and the time period of post-acquisition performance assessments.

INTEGRATION APPROACHES Prescriptive work on the effective approaches to integrating acquisitions is reasonably consistent in terms of conceptualizations of the various approaches utilized by firms engaging in this type of transaction. Employing a cultural based perspective, the seminal work of Nahavandi and Malekzadeh (1988) identify various modes of acculturation based on two primary dimensions from the acquiring firm’s perspective – degree of relatedness between the two firms and the degree of tolerance for multiculturalism by the acquiring firm. Moreover, these authors provide a brief description of each mode of acculturation – Separation, Assimilation, Integration, and Deculturation. Taking into consideration varying levels of the need for strategic interdependence and the need for organizational autonomy following an acquisition, Haspeslagh and Jemison (1991) develop a capabilities-based contingency framework that identifies three primary integration approaches – Preservation, Absorption, and Symbiotic. Recognizing that the set of attributes required to create value and yield the desired benefits vary by approach, these authors provide detailed insight as to what combination of factors is critical to the effective management of each approach. More recently, Marks and Mirvis (1998) also discuss several main ways in which firms combine their operations following an acquisition. Using the degree of post-combination change in both the acquiring and the acquired firm respectively as the basis of their classification scheme, these authors identify and describe the organizational attributes necessary to successfully manage five major integration approaches – absorption as well as reverse merger/assimilation, preservation, best of both, and transformation. Even though Nahavandi and Malekzadeh (1988) uses a culturally based perspective and Marks and Mirvis (1998) examines the degree of change in both the acquiring as well as the acquired firm, the resulting integration approaches they identify are quite similar to those of Haspeslagh and Jemison (1991) in terms of the extent to which and how firms are reconfigured after an acquisition. Figure 1 provides a graphical depiction of the overlap in integration approaches identified in these three key works. The integration approaches in normal print denote Haspeslagh and Jemison’s (1991) classifications, the integration modes identified in parentheses are based on Nahavandi and Malekzadeh’s (1988) categorizations and the approaches to post-acquisition integration appearing in bold and italics

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Fig. 1. Integration Approaches.

print reflect the work of Marks and Mirvis (1998). Because of these parallels, characteristics associated with these integration approaches represent a central phenomenon such that there appears to be an ideal or best way to effectively manage each approach.

HYPOTHESIZED IDEAL APPROACHES1 Preservation Approach The Preservation approach, characterized by limited strategic interdependence of the firms involved but a high need for operational autonomy in both firms, allows the target firm to continue operating independently following the acquisition. In essence, this approach involves very little change in either of the two firms involved in the transaction given that one of the primary drivers of achieving post-acquisition success is the ability to keep intact those strategic capabilities being obtained from the target firm. As a result, this approach necessitates integration tasks such as allowing for continuing differences within the target firm, giving autonomy and decision-making authority to the target firm management, and providing resources to improve the operations of the target firm as needed. The integration approach utilized by Fifth Third following its acquisition of Old Kent resembles preservation. The chairman, CEO, and president Old Kent (one individual held all three titles) became chairman and CEO of the new Michigan affiliate of Fifth Third created as a result of this deal (PR Newswire, 2000).


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This is consistent with the Fifth Third’s business model utilized to minimize integration risks, which divides the company into affiliate banks operated by local management teams. Bank presidents of each decentralized affiliate are given a broad range of authority and held accountable for their performance levels. This quote from Fifth Third’s 2002 annual report further supports the preservation of the acquired firms’ primary operations: We think small. We operate as 16 affiliate banks instead of one, unwieldy entity. By dividing our bank into 16 operating units, we avoid the stifling bureaucracy of a huge monolith and unleash the entrepreneurial talents of our bank presidents and their employees (p. 6).

Absorption Approach The Absorption approach2 represents the condition in which the need for operational autonomy in both firms is low and the need for strategic interdependence is high. The primary goal of the acquiring firm using this approach is to fully consolidate the activities of both firms, primarily through assimilating the target firm into its operations and culture. Because this approach usually involves a significant degree of change in the target firm, it is essential to proceed in a fairly predetermined, consistent, and fast paced manner so as to minimize the level of disruption and uncertainty surrounding the post-acquisition integration process. Thus, in order to effectively deal with the challenges imposed by absorbing the target firm, this approach requires preliminary planning for key integration issues, a transition structure to oversee integration efforts, communications throughout the process, and a calendar with milestones as well as time pressures for change. Based on articles in business periodicals and discussions in its 2002 annual report, the recent deal involving Hewlett Packard and Compaq is an example of an absorption approach (Hewlett-Packard, 2003). Motivated primarily by the need to lower its cost structure and improve market position, the combined firm engaged in extensive integration planning efforts prior to completing the deal, named an executive leader to oversee integration efforts, developed a detailed integration timetable along with measurable targets, and implemented several restructuring initiatives within months of deal closing. Examples of such actions designed to achieve operational efficiencies and cost-based synergies include about a 7% reduction in the combined firm’s workforce, consolidation of purchasing and manufacturing functions, and elimination of overlapping product offerings. In addition, the combined firm made efforts to manage activities related to workforce reduction in an informative, caring fashion to minimize potential disruption during the change process. Highlighting the critical role of timing when using this

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approach, the executive vice-president in charge of integration stated “We early on noted that we wanted to make two-thirds of our projected savings in the first six months . . . In terms of what makes mergers succeed, it’s about getting your costs out fast . . .” (Coleman, 2002, p. A7). Symbiotic Approach Used in situations where there is a critical need for both operational autonomy and strategic interdependence, the Symbiotic approach involves a period of initial preservation and then a gradual blending of best practices from both firms. This integration process requires both firms to undergo some degree of change as efforts are made to create a combined firm that reflects the core competencies and leading practices of both previous firms. Moreover, it is important to develop an atmosphere of cooperation between members of the two firms given the need to first coexist and learn from each other before amalgamating the two firms and making major strategic changes in both firms. As a result, this approach requires some operational responsibility by target firm managers, a transition management structure to coordinate integration activities as well as help identify best practices, and a slower pace to deal with the complex challenges created by balancing the need for boundary protection and boundary permeability. Press releases and its annual report indicate that the new Dean Foods, created following the deal between Suiza Foods and Dean Foods, is utilizing a symbiotic integration approach (Dean Foods, 2002; PR Newswire, 2001a). The primary motives for the deal include increasing size, leveraging complementary product offerings, expanding geographic market coverage and achieving cost-based synergies. The combined firm initiated several actions designed to remove boundaries between the two firms such as the consolidation of manufacturing and distribution activities as well as the elimination of duplicative costs in various areas of the combined firm. On the other hand, the combined firm appears to be moving more purposefully with other integration activities as it seeks to identify new growth opportunities, leverage the resources and capabilities of both previous firms, and determine which assets and businesses do not fit its long-term business strategy thereby becoming candidates for divesture. The following quote from its 2001 annual report summarizes Dean Foods’ view of its integration approach: Integrating two groups like ours gives us the opportunity to learn from each other, and to improve our business by adopting the ‘best practices’ of each organization – with our primary goal always being to better serve our customers (p. 4).


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Transformation Approach While the Symbiotic approach necessitates some degree of change in both firms as best practices are adopted, occasionally the integration process involves very significant, fundamental changes in the organizational culture and operating practices of both firms. In these cases where both firms are essentially dismantled as a part of integration efforts, the mode of combining operations is referred to as a Transformation approach. As eluded to by Haspeslagh and Jemison (1991) and described in more detail by Marks and Mirvis (1998), this approach requires the newly combined firm to totally reinvent itself by creating a new organization, set of values and way of operating instead of blending together the best elements of both original firms. To facilitate the discovery and development of new practices, routines, organizational culture, and the like, firms utilizing this integration approach need to manage the process in an inclusive and inventive manner. This necessitates developing a blueprint of the new organization’s structure, culture and similar features, clearly articulating the strategic vision of the new company as well as how and why major decisions are made, involving members of both firms in decision-making, and establishing a temporary management structure to oversee and coordinate integration efforts. An example of a recent deal that utilizes this integration approach is ConocoPhillips. Based on publicly available reports, this combined firm engaged in extensive preliminary planning efforts, maintained a relatively equal representation of employees from both firms in upper level management positions, appointed eight sitting directors from both firms’ to the new board, emphasized communication among all employees, clearly articulated the strategic vision of the combined firm among other activities (Business Wire, 2002; PR Newswire, 2001b). Moreover, the following quote from a printed interview with President and CEO J. J. Mulva in ConocoPhillips’ 2003 annual report directly mentions some of the main attributes of this integration approach: We’re starting to see a new culture emerge. We’ve been trying to get away from saying we’ll take the best of this and the best of that, and cutting and pasting. Instead, we’re making the tough decisions and moving on with the new company. Our core values – the SPIRIT of Performance – provide a sturdy framework upon which our new culture can further develop (p. 8).

Holding Approach The Holding integration approach which appears in the lower, left quadrant of Fig. 1 involves a situation where the acquiring firm acts basically as a holding

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company with no intention of integrating the two firms. According to the respective authors, the acquired firm is likely to be kept completely at arm’s-length and/or eventually disintegrate as a cultural entity. Moreover, this approach differs from the preservation approach in that the integration choice may not necessarily be driven by a strategic need for organizational separation/operational autonomy but results from a lack of concern for the integration decision-making process. Given the absence of integration intention, this general approach will not be considered in this study.

Integration Approaches and Key Process Dimensions The critical activities associated with the effective management of various integration approaches appear to emphasis what we consider to be five main components of the post-deal combination process. Table 1 provides a summary of these process dimensions and identifies for which integration approach each dimension is hypothesized to be critical. Because of our emphasis on a specific type of acquisition in the current study, only the Absorption, Symbiotic, and Transformation approaches are addressed in subsequent sections.3 One group of process dimensions consists of those activities that reflect the extent to which the integration process is managed a manner perceived to be fair and just. This group, referred to as Procedural Justice, includes bilateral communications, provision of details used in decision-making, consistency in the decision-making process, and familiarity of the acquiring firm with the acquired firm. The second group of activities, Target Firm Involvement, taps the extent to which managers of the target firm are included in the combined firm’s decisionmaking process. Specific activities include the ability of target firm’s managers to refute decisions and the level of autonomy given to target firm managers. The next set of process dimensions relate to Preliminary Planning efforts. These activities Table 1. Process Dimensions Hypothesized to be Critical Components of Each Integration Approach. Preservation Procedural justice Target firm involvement in decision making Preliminary planning Transition management structure Timing of changes

Absorption

Symbiotic

∗ ∗

Transformation ∗

∗ ∗

∗ ∗

∗

∗

∗

∗

∗


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include the existence, detail, and flexibility of preliminary plans as well as issues considered by the firms when developing such “blueprints” for combining their operations. Another critical set of activities discussed in the prescriptive works on acquisition integration approaches relate to Transition Management Structure. This group of activities includes the composition and structure of the transition management team as well as its primary goals. The final dimension of M&A process management is the Timing of Changes. This captures the importance of pacing integration activities such that changes occur in a relative fast or a more gradual fashion.

METHODOLOGY Because integration challenges and therefore critical dimensions of the acquisition process vary by deal type and the size of firms involved (Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986; Schweiger, Csiszar & Napier, 1993), we decided to focus our attention on a specific type of acquisition. Restricting our study to one type of acquisition allows for a more careful examination of withintype performance differences, a need expressed in prior studies (Ramaswamy, 1997), and central to the hypotheses of interest here. Thus, we chose to examine the different hypothesized ideal integration approaches within a specific context: large, related acquisitions involving firms of similar size. This special type of acquisition was selected for several reasons. First, from a practical standpoint there has been a steady increase over the last five years of mega-deals that bring together firms competing in the same industry and of similar size such that now they account for nearly 75% of all deals involving publicly traded firms (Mergerstat, 2000; PricewaterhouseCoopers, 2000). Moreover, M&As of relatively equal-sized firms are not only popular, but they are also phenomenologically unique (Carey, 2000). While these deals generate great expectations about synergistic benefits and ultimate performance gains from multiple stakeholders, they also involve high levels of uncertainty as one, and in some cases, both original firms are dismantled to create the new combined organization (Carey, 2000; Haspeslagh & Jemison, 1991; Olie, 1994). Because of the strategic stakes involved and the need for success, the effects of the integration process are drawn into high relief in this special type of acquisition. In addition, as a way of addressing the management challenges associated with this significant event in the life of both organizations, it is likely that various integration approaches will be utilized to combine their operations. This permitted us to examine the extent to which post-acquisition performance is a function of hypothesized configurations of process elements for at least three of the four common integration approaches.

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Sample Criteria Focusing on this specific type of acquisition required certain criteria to be established. First, large acquisitions are defined as those with a transaction value of at least $100 million (Hayward & Hambrick, 1997; Sirower, 1997). Relatedness is based on transactions meeting one of two requirements – the first involves the traditional method of matching both firm’s primary SIC code at the two-digit level (Lubatkin, 1987) and the second requires that the two firms have at least one four-digit SIC code match among the top six lines of businesses they are operating in at the time of the acquisition (Haleblian & Finkelstein, 1999). Consistent with a similar category of mergers identified by Ravenscraft and Scherer (1987), similar size is measured as firms having a relative sales or assets ratio between 0.5 and 2.0 where one firm is no more than twice the size of the other firm. Sales and assets of both firms the year prior to the acquisition are used in calculating this ratio. The last criterion limits the time frame to transactions completed between 1995 and 1998. This four-year period is appropriate given the need to minimize the potential of retrospective bias when utilizing primary data collection techniques such as surveys and interviews. Moreover, this time frame is fitting given the fact that it usually takes firms two to three years to combine their operations following an acquisition, thus allowing for the evaluation of the effectiveness of the integration process.

Final Sample Size The initial population of interest consisted of 360 acquisitions meeting the aforementioned criteria. After making adjustments for multiple acquisitions by an acquiring firm during the sample period, subsequent acquisitions of firms that had been the acquiring firms in previous transactions, divestures of a portion of the acquired firm’s assets, and spin-offs of combined assets into a separate entity, the resulting sample consisted of 305 transactions. Surveys, administered via fax were received from 107 key informants quite knowledgeable about the details surrounding the focal acquisition (the vast majority of which were Presidents, Chief Financial Officers, Vice Presidents-Acquisitions, or Vice Presidents – Corporate or Business Development). This represented a 35% response rate that was considered high given the time demands placed on top managers and the sensitive nature of this research topic (Singh & Zollo, 1998).4 After removing observations that had missing responses for key variables and in which the acquiring firm was private, the overall sample was reduced to 101.


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Dependent Variable Consistent with arguments provided by Cannella and Hambrick (1993), and Datta, Grant and Rapagopolan (1991), it is believed that a firm’s top executives provide an assessment of performance that is much closer to reality than archival measures. Managers assessed changes in the combined firm’s profitability and stock price on a five-point scale that ranged from significant decrease (=1) to significant increase (=5). Further, because of the potential existence of a post-merger drift syndrome characterized by performance declines up to two years after the acquisition due to the diversion of management attention from regular business operating towards integrating the firms (Buono & Bowditch, 1989), performance measures were collected for two time periods – one year after the acquisition itself and one year after completing the integration process. This was necessary to determine if the fit score was a significant predictor of performance at one or both points following the acquisition. Factor analyses revealed that the two performance indicators loaded on a single factor explaining 73 and 70% of the variance for the year after the acquisition and the year after completing the integration process respectively. In addition, the Pearson correlation coefficients associated with these two performance measures for both time periods were statistically significant at the 0.001 level, thus further justifying the use of a composite measure to assess changes in post-acquisition performance of the combined firm.

Independent Variables Integration Approach The characteristics of integration approaches consistently described by Haspeslagh and Jemison (1991), Marks and Mirvis (1998) and Nahavandi and Malekzadeh (1988) served as an initial guideline to classify the manner in which firms combined the operations of the two previously separate companies. Next, in order to identify the specific integration approach being employed by the firms involved in the current research project, press releases and annual reports discussing the acquisitions in the final sample were reviewed and content analyzed to determine: (1) the primary motives for the current acquisition; (2) if the combined firm would operate under a new name; (3) whether references were made to a “new” company or just to the name of the acquiring firm; (4) the extent to which the combined firm would follow the operating procedures of the acquiring firm or seek to identify best practices of both firms; (5) the composition of the top management

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Table 2. Profile of Integration Approaches. Approach

Critical Components

Preservation (n = 4)

• Revenue growth and market position key motives • Plans to retain majority of target’s TMT and/or target brand name • Neither firm changed significantly • No plans to integrate key business areas • Cost savings, increase size and market position primary motives • Acquiring firm’s procedures being used in target firm • Use of the words “assimilate” or “absorb” • Discussion of restructuring/downsizing issues • Integration efforts started 1–3 months of deal closing for most areas • Expand products/geographic areas and increase size primary motives • No plans to integrate or delay in integration efforts in many or most business areas • Highlight efforts to identify the best practices of both firms • Complementary nature of businesses, revenue growth, increase size and cost savings primary motives • Combined firm operates under new name; references to “new” entity • Number of individuals from target firm included on TMT and board of directors • Mention of both firms changing significantly • Start of integration efforts in key business areas appear to be spread across time intervals

Absorption (n = 40)

Symbiotic (n = 24)

Transformation (n = 33)

team and board of directors following the acquisition; (6) if any plans existed for restructuring and downsizing initiatives; and (7) whether words such as assimilate, absorb, blend, or retain were used in describing the process of integrating the operations of the two firms. Based on their assessment this information, two raters well versed in the acquisition process literature then classified the integration approach being used as one of four main approaches – Preservation, Absorption, Symbiotic, or Transformation with 92.5% agreement. Of the 101 acquisitions in the final sample, 40 used the Absorption approach, 33 utilized the Transformation approach, 24 employed the Symbiotic approach, and only 4 followed the Preservation approach.5 The resulting profiles for each of the integration approaches are summarized in Table 2. Procedural Justice and Target Firm Involvement Scale items, consistent with the work of Kim and Mauborgne (1993) but modified slightly to be specific to an acquisition context, existed for each component of procedural justice: (1) Bilateral Communications; (2) Consistency in Making and Executing Decisions; (3) Full Account of Details related to Decision Making; (4) Acquiring Firm’s Familiarity with the Acquired Firm; and (5) Ability of the


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Acquired Firm to Refute Decisions. In addition, an item was included to more directly assess the level of autonomy retained by the acquired firm (Datta et al., 1991; Ranft, 1997). Respondents evaluated each item along a five-point scale where 1 indicated that the characteristic did not exist at all and 5 signified that the feature existed to a very large extent. In developing the survey instrument, we expected the ability of the acquired firm to refute decisions as well as the level of autonomy retained by the acquired firm to both reflect target firm involvement in the decision-making process. Consistent with this expectation, a factor analysis revealed that the items discussed above represented two distinct constructs. The two-factor solution was generated using the VARIMAX rotation and accounted for 69% of the variance. One factor included the acquired firm’s ability to refute or challenge decisions made by the acquiring firms as well as the autonomy retained by the acquired firm with regards to strategic and operational decision-making. As a result, this factor was labeled Target Firm’s Involvement in Decision-Making Processes. The second factor, on which the other four items loaded, was referred to as General Procedural Justice. Preliminary Planning Consistent with anecdotal evidence discussing important aspects of preliminary planning, two items assessing the level of detail and extent of flexibility were developed and included on the survey (Haspeslagh & Jemison, 1991; Mirvis & Marks, 1994). These items, ranked on an ordinal level scale ranging from 1 (not at all) to 5 (very large extent) tapped the same underlying construct as evidenced by the fact that Cronbach’s Alpha was 0.9267 and they loaded on a single factor with an Eigenvalue of 1.8641 explaining 93% of the variance. Thus, both items were summed and the composite score used in subsequent tests. Transition Management Structure Using research from extensive case studies as a guide, three items were created to measured the extent to which the transition structure: (1) involved members from both organizations; (2) included employees from various levels within the firm; and (3) used specific task forces in key functions (Haspeslagh & Jemison, 1991; Marks & Mirvis, 1998). Respondents rated each item on a scale from 1 (not at all) to 5 (very large extent). Since these items had high internal consistency (Cronbach’s Alpha = 0.9647) and loaded on a single factor (Eigenvalue = 2.806 with 94% explained variance), the three items were summed to form a composite score. Timing Because anecdotal research by several scholars suggests that the length of time necessary to complete the integration process varies by approach and influences

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post-acquisition performance, it was necessary to also capture the timing of such efforts (Haspeslagh & Jemison, 1991; Schweiger et al., 1993; Shrivastava, 1986). Thus, respondents were asked to indicate how long it took to completely integrate the operations of the two firms following the acquisition. The time increments provided on the survey instrument included 0–6 months, 7–12 months, 13–18 months, 19–24 months, 25–36 months, and longer than 36 months. This variable was coded as an ordinal level variable ranging from 1 to 6. Prior Performance Consistent with previous acquisition studies, prior performance was used as a control variable and measured based on return on assets (Ramaswamy, 1997). Because of the focus on similar-sized acquisitions, data for net income and total assets were collected from COMPUSTAT for both the acquiring and acquired firm as well as all firms operating in the same primary SIC code as the acquiring firm to generate what was equivalent to a pro forma, average industry-adjusted ROA for the three-year period prior to the acquisition.

Analytical Technique We utilized profile deviation analysis to determine if multiple components of the integration process occurred together in some pattern to influence post-acquisition performance levels. The first step was to develop ideal profiles for each integration approach. Consistent with previous studies using the concept of fit, ideal profiles were developed based on actual firm results (Venkatraman, 1989). The measures corresponding to each construct were based on the average values observed in the top 10% of the firms using each integration approach. For example, since 40 firms utilized the absorption approach, the mean value of each process variable (procedural justice, target firm involvement in decision making, preliminary planning, transition management, and timing) for the top 4 firms served as the basis for calculating fit. This ranking procedure to determine the top 10% was done for each integration approach and both dependent variables. For each process variable, a difference score was computed by taking the absolute value of the acquiring firm’s value for that particular variable minus the ideal value described above. These difference scores were summed and the resulting value used in the regression model (Meglino, Ravlin & Adkins, 1992). Prior to calculating the fit score, the values for each of the process variables were standardized to remove any effects resulting from differences in scale variances (Doty, Glick & Huber, 1993). Admittedly, this approach has some limitations (Edwards, 1993). However, the current sample size precluded the use of an


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alternative approach to test congruence based on polynomial regression analysis that has limitations as well. Because the goal of this analysis was to further recent work that suggests inter-relationships exist among dimensions of the acquisition process (Hitt, Harrison, Ireland & Best, 1998; Ranft, 1997), it was decided that the use of difference scores was appropriate in examining if process variables occurred in some pattern to influence outcomes in related acquisitions involving firms of similar size.

RESULTS To test whether a configuration of attributes affects post-acquisition performance, the difference score was entered into a regression model. Separate models were run for each dependent variable by integration approach controlling for the combined firm’s performance prior to the acquisition.6 As shown in Table 3, the difference score was a significant predictor of the change in financial-based performance one year after the acquisition for firms utilizing an absorption approach (p < 0.05) Table 3. Financial-Based Performance One Year After Acquisition Ideal Profiles by Integration Approach. Absorption Differences along process dimensions Overall procedural 0.51+ (−0.28) justice Target’s involvement in 0.28+ (−0.62) decision making Preliminary planning 5.40 (4.16) Transition management 2.60+ (8.49) Timing 2.80 (2.86) Model results Prior performance Fit score R-square

−4.0441 (3.8142) −0.2536* (0.1296) 0.169

Symbiotic

Transformation

−0.33 (−0.31)

1.31** (0.31)

1.62+ (0.85)

−0.31 −(0.01)

7.50** (4.09) 5.00 (6.55) 4.00 (3.41)

5.00 (4.97) 13.00 (11.63) 2.00+ (3.23)

−2.2167 (2.4240) 0.0047 (0.1495) 0.040

−4.5071 (4.9207) −0.3576*** (0.0898) 0.348

Notes: Both the means of the top performer and all firms using the particular approach (value in parentheses) are shown for each process dimension. Boldfacing indicates a significant difference in the mean of these two groups based on t-tests. Regression coefficients are shown for prior performance and the fit score with the standard error term in parentheses under the section labeled Model results. +p < 0.10. ∗p < 0.05. ∗∗p < 0.01. ∗∗∗p < 0.001.

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and transformation (p < 0.001). Those higher performing firms consolidating the activities of both firms following the acquisition had moderate levels of procedural justice and target firm involvement in decision-making. In addition, those firms experiencing higher levels of change in financial based performance one year after the acquisition itself when utilizing an absorption approach established a minimum transition management structure. The inter-relationships among the process variables also affected post-acquisition performance the year immediately following the acquisition for firms employing a transformation approach. Those firms experiencing high levels of financial performance when reinventing the company after the acquisition engaged in activities that created high levels of perceived fairness in their overall management of the combination process and completed integration efforts in a timely fashion. Table 4 provides the results of the regression analyses testing the significance of the difference score as a predictor of changes in financial-based performance one year after the integration process was completed. Consistent with models analyzing changes in financial-based performance one year after the acquisition Table 4. Financial-Based Performance One Year After Integration Completion − Ideal Profiles by Integration Approach. Absorption Differences along process dimensions Overall procedural 0.67 (−0.24) justice Target’s involvement in −0.29 (−0.72) decision making Preliminary planning 4.00 (4.19) Transition management 11.33* (7.52) Timing 3.00 (2.63) Model results Prior performance Fit score R-square of the model

−1.5964 (5.6164) −0.3360* (0.1608) 0.145

Symbiotic

Transformation

−0.68** (0.30)

1.05 (0.64)

1.28 (0.56)

−1.02** (0.13)

6.00 (5.50) 13.50+ (8.42) 5.00+ (2.33)

8.00*** (4.84) 13.50 (12.37) 3.00 (2.68)

3.2024 (6.5230) −0.2357+ (0.1331) 0.268

−1.7624 (9.7659) −0.2772+ (0.1508) 0.161

Notes: Both the means of the top performer and all firms using the particular approach (value in parentheses) are shown for each process dimension. Boldfacing indicates a significant difference in the mean of these two groups based on t-tests. Regression coefficients are shown for prior performance and the fit score with the standard error term in parentheses under the section labeled Model results. +p < 0.10. ∗p < 0.05. ∗∗p < 0.01. ∗∗∗p < 0.001.


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itself, inter-relationships among the process variables affected the post-integration performance levels of firms utilizing an absorption (p < 0.05) and transformation (p < 0.08) approach. In addition, the difference score was a marginally significant predictor of changes in post-integration financial performance for firms employing the symbiotic approach (p < 0.10). Higher performing firms utilizing an integration approach characterized by significant changes in one firm recognized the importance of designing a temporary structure to oversee integration efforts in their ability to achieve post-integration performance improvements. Likewise, for firms seeking to blend their operations and capitalize on the best of both original firms, increases in financial-based performance following completion of the integration process were influenced by engaging in high levels of transitional efforts. In addition, higher performing firms using the symbiotic approach blended the operations of the two previous firms over a gradual time period and limited the attention given to procedural justice components. Finally, higher performing firms deciding to reinvent their company developed preliminary plans for combining operations but also limited involvement of the target firm in decision-making. Thus, in general, the results of our study indicate that within the context of large, related acquisitions involving firms of similar size, process variables tend to occur in some configuration, thereby affecting changes in performance after the acquisition. In addition, the importance of process dimensions varied not only by integration approach but also based on the time period in which assessments of changes in post-acquisition performance were made.

DISCUSSION AND CONTRIBUTIONS In an effort to better understand what distinguishes those acquisitions that are successful from those that are not successful in achieving desired post-acquisition outcomes, the current study focused attention on the acquisition integration process. In doing so, the primary purpose of this study was to empirically examine the long-held beliefs about the implied configurations of process dimensions required to effectively manage different integration approaches. The critical components of the acquisition integration process identified from previous literature included procedural justice, target firm involvement, preliminary planning, transition management, and timing of combination efforts. Based on the consistent, prescriptive work by Haspeslagh and Jemison (1991), Marks and Mirvis (1998) and Nahavandi and Malekzadeh (1988), we developed and then tested ideal profiles for the effective management of three primary integration approaches – Absorption, Symbiotic, Transformation. By using deviation analyses,

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we expand the recent work of Hitt et al. (1998) and Ranft (1997) by providing additional support that not only do process dimensions occur together in some pattern to influence post-acquisition performance but also the relative importance of process dimensions vary by integration approach and the time period in which post-acquisition performance changes are assessed. When utilizing an integration approach where the goal is to fully consolidate the activities of both firms, the fit score was a significant predictor of changes in financial-based performance at both time periods. This suggests that process variables occur in some pattern to facilitate the combined firm’s ability to achieve the cost savings, operational efficiencies, and other synergistic benefits necessary to improve financial performance following the acquisition. The top financial-based performers the year after the acquisition had higher levels of procedural justice and target firm involvement in decision-making, but a lower extent of transition management as compared to other firms utilizing the absorption approach. On the other hand, the top performing firms the year after completing integration efforts had higher levels of transition management activities as compared to other firms choosing to absorb. This suggests that when similar-sized firms choose an absorption approach it is important to manage the integration process in a fair and just manner so as to minimize disruptions and uncertainties that accompany this type of transaction. Moreover, contrary to most prescriptions for absorbing firms, involving members of the target firm appears to be important during the initial stages of the integration process in this special type of acquisition. Also, establishing a transition structure to oversee integration efforts may need to be delayed until the appropriate environment has been created and employees of both firms perceive integration activities to be fair. For firms using a symbiotic approach, the fit among process variables was a significant predictor only of changes in financial-based performance the year after completing the integration process. The top performing firms along this performance measure engaged in more transition management activities while taking longer to completely integrate operations as compared to the subgroup mean. These attributes highlight the importance of establishing a temporary structure to oversee integration activities over a longer time frame in order to effectively deal with the complex challenges associated with balancing boundary protection with boundary permeability. In addition, it appears that because both firms undergo some degree of change to incorporate the “best of both,” components of procedural justice become less important when utilizing this integration approach. Finally, the fit score was also a significant predictor of changes in financialbased performance for both time periods when employing the transformation approach. Because of the magnitude of changes in both firms, it is likely that multiple process activities interact to minimize disruption and tension within the


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combined firm, especially during the initial stages of the integration process. Top performing firms the year after the acquisition had higher levels of procedural justice while completing integration efforts in a timely fashion as compared to the subgroup mean. Those firms with the highest increases in post-integration financial-based performance engaged in more detailed and flexible preliminary planning efforts and limited the target firm’s involvement in decision-making. Collectively, these findings suggest that managing the process in a manner perceived to be fair and just by members of both firms is critical to increasing financial based performance the year after the acquisition when the combined firm decides to totally reinvent itself thereby creating a new, unique organization. In addition, developing preliminary plans and limiting the target firm’s involvement in decision-making have longer-term effects on the combined firm’s ability to realize performance improvements following an acquisition. In addition to making theoretical contributions with regard to the effective management of the three primary integration approaches, our research is of significant practical importance given the specific focus on large, related acquisitions of relatively equal sized firms. As industries continue to consolidate, global competition further intensifies, and economies of scale and scope become more critical, the trend toward this special type of merger is likely to persist. However, for just about every news story announcing the decision of two firms to engage in a mega-merger of equals, there is another article discussing the difficulties faced by firms in the process of integrating the two previously separate entities. Thus, the results of this research provide timely and potentially valuable insight into how to effectively manage the integration process associated with this extreme case of M&As. By doing so, the findings help managers better handle the difficulties often posed by such large-scale organizational transformations, thereby realizing the intended performance gains and other sources of long-term value. The collective results of the current study place the long-held beliefs and prescriptions about effective acquisition integration on firmer ground, for the most part, while highlighting some areas of discrepancy. The discrepancies are likely due to the focus on related acquisitions of similar-sized firms, thereby providing initial information about some of the boundary conditions of existing theory and prescriptions. It would seem fruitful for future research to further identify types of acquisitions where existing theories and prescriptions do and do not hold.

NOTES 1. Because of their more detailed discussion of the effective management of the Absorption, Preservation and Symbiotic integration approaches, Haspeslagh and Jemison’s

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(1991) classification scheme is used in the current study as the primary source of developing the ideal configurations. Marks and Mirvis (1998) serves as the primary basis for the development of the ideal configuration of process elements for the transformation approach because of their direct identification and description of this integration approach. 2. It is worth noting that occasionally the target firm of record assumes the leadership position in terms of managing the integration process. In these instances, the integration approach may be described as reverse merger, reverse absorption or reverse assimilation. While the roles of the acquiring and target firm are switched, the critical components of managing the integration process remain the same. 3. The Preservation Approach is not likely to be utilized by many firms engaging in the specific type of acquisition that we emphasis in the current study because of the importance of factors such as achieving economies of scale, realizing synergies and transferring capabilities to the combined firm’s ability to create value. 4. There were no statistically significant differences between non-respondents and respondents in terms of sample criteria used (transaction value, relative sales and relative assets). In addition, mean comparisons of early and late respondents in terms of the sample criteria as well as independent variables examined in the current study revealed no significant differences between the two groups. Thus, the current sample is representative of large, related acquisitions completed from 1995 to 1998 that involved firms of similar size. 5. As expected, few acquisitions (n = 4) meeting the established sample criteria utilized the Preservation Approach. As a result, this integration approach was not examined in subsequent empirical analyses. 6. The inclusion of other variables used in acquisition studies as control variables (strategic fit, organizational fit, market fit, prior acquisition experience, and top management retention) yielded very similar results with regard to the significance of the fit score. For parsimony the more streamlined model is presented.

REFERENCES Booz Allen and Hamilton (2001). Merger integration – delivering on the promise (July). Buono, A. F., & Bowditch, J. L. (1989). The human side of acquisitions. San Francisco, CA: Jossey-Bass. Business Wire (2002). ConocoPhillips senior management positions announced (February 26). Cannella, A., & Hambrick, D. C. (1993). Effects of executive departures on the performance of acquired firms. Strategic Management Journal, 14, 137–152. Carey, D. (2000). A CEO roundtable on making mergers succeed. Harvard Business Review, 78, 145–154. Coleman, M. (2002). HP-Compaq a “consolidation”; It’s not an expansion. Investor’s Business Daily (October 31), A7. ConocoPhillips (2003). An interview with CEO Jim Mulva. 2002 Annual Report, 8–9. Datta, D. K., Grant, J. H., & Rapagopolan, N. (1991). Management incompatibility and postacquisition autonomy: Effects on acquisition performance. In: P. Shrivastava (Ed.), Advances in Strategic Management (Vol. 7, pp. 157–182). Dean Foods (2002). A new Dean: A new day in dairy. 2001 Annual Report, 4–5. Doty, D. H., Glick, W. H., & Huber, G. P. (1993). Fit, equifinality, and organizational effectiveness: A test of two configurational theories.


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MANAGING HUMAN RESOURCES IN CROSS-BORDER ALLIANCES夽 Randall S. Schuler, Ibraiz Tarique and Susan E. Jackson It’s clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine. Daniel Vasella, CEO, Novartis (Herper, 2002)

INTRODUCTION The media often portray business organizations as warring enemies who define their own success by the demise of their competitors. Executives sometimes use similar imagery to motivate their “troops.” What such images ignore are the strong interdependencies among business organizations and the degree to which cooperation results in mutual gains. Just as nations have discovered the benefits of economic cooperation, businesses have learned that success often depends on forming strategic alliances. Successfully managing strategic alliances is surprisingly difficult, however. The 1998 DaimlerChrysler cross-border merger illustrates some of the management challenges inherent in managing cross-border alliances. Competitive forces in the global auto industry initially led the two companies to merge. The combination looked good on paper, but cultural differences interfered with management’s ability to quickly reap the economic benefits they had anticipated. Clashes due 夽 Portions

adapted from, R. Schuler, S. Jackson & Y. Luo, Managing Human Resources in CrossBorder Alliances, (London: Routledge: 2004) and H. Scullion & M. Linehan (Eds) International Human Resource Management: A Critical Text (London: Palgrave/MacMillan: 2003). Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 103–129 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03005-4

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to differences in country cultures and company cultures nearly doomed the new company’s success. It seemed to take years for management to focus on a common vision and agree to the need for a single unifying culture. Although the alliance seems now to be succeeding, the initial years of difficulty might have been avoided if the managers had understood and appreciated the many HR issues that would require their attention (Apfelthaler, Muller & Rehder, 2002).

STRATEGIC ALLIANCES AMONG FIRMS In general, strategic alliances involve two or more firms agreeing to cooperate as partners in an arrangement that’s expected to benefit both firms. Sometimes strategic alliances involve one firm taking an equity position in another firm. In the most extreme case, one firm acquires the other firm. But less extreme equity positions also are common. Ford, for example, has equity in both foreign and U.S. auto parts producers, but it has not acquired these companies. Many strategic alliances do not affect legal ownership, however. In the airline industry, a common type of alliance is between an airline and an airframe manufacturer. In high-tech industries, strategic alliances allow older, established firms to gain access to the hot new discoveries being made by scientists in universities and in small, creative organizations. For example, the U.S. biotechnology industry is characterized by networks of non-equity relationships between new biotechnology firms dedicated to research and new product development and established firms in industries that can use these new products, such as pharmaceuticals. In return for sharing technical information with the larger firms, the smaller firms gain access to their partners’ resources for product testing, marketing, and distribution (Liebeskind, Oliver, Zucker & Brewer, 1996). In this chapter, we focus on strategic alliances between firms that are headquartered in different countries. We refer to these as cross-border alliances, or CBAs. Cross-border alliances can be defined as partnerships that are formed between two or more firms from different countries for the purpose of pursuing mutual interests through sharing their resources and capabilities (Doz & Hamel, 1998; Yan & Luo, 2001). As is true for strategic alliances in general, there are many types of cross-border alliances. Two broadly categories of cross-border alliances are those that involve equity investments and those that involve no shared equity or joint capital investment. A non-equity cross-border alliance is an investment vehicle in which profits and other responsibilities are assigned to each party according to a contract. Each party cooperates as a separate legal entity and bears its own liabilities. Non-equity

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alliances have great freedom to structure their assets, organize their production processes, and manage their operations. This type of alliance can be developed quickly to take advantage of short-term business opportunities, then dissolved when their tasks are completed. Among the many types of non-equity alliances are joint exploration projects, research and development consortia, co-production agreements, co-marketing arrangements, and long-term supply agreements. International joint ventures and international mergers & acquisitions are two major types of equity-based cross-border alliances. Such arrangements typically represent a long-term collaborative strategy. Furthermore, equity-based alliances require active day-to-day management of a wide variety of human resource (HR) issues. Some of the HR issues that are critical to the success of equity-based cross-border alliances may also arise in non-equity cross-border alliances, but they may be less central to the success of the alliance. In equity-based cross-border alliances, however, long-term success is impossible unless HR issues are managed effectively. While there are many lessons that can be transferred from our discussion of equity-based cross-border alliances to managing HR issues in non-equity alliances, most of our discussion focuses on describing the challenges of managing human resources in equity-based cross border alliances. More specifically, we focus on international joint ventures and international mergers and acquisitions.

INTERNATIONAL JOINT VENTURES An international joint venture (IJV) is one type of equity-based cross-border alliance. Alliance partners form a joint venture when they create a separate legal organizational entity representing the partial holdings of two or more parent firms. In international joint ventures, the headquarters of at least one partner is located outside the country of the joint venture. Joint ventures are subject to the joint control of their parent firms. The parent firms, in turn, become economically and legally interdependent with each other. Firms form international joint ventures for many reasons. In some countries, the host government provides strong incentives to foreign firms to use joint ventures as a mode of entry into their markets (Geringer & Hebert, 1989). Another reason to form joint ventures is to gain rapid access to new markets. Learning is another objective behind many international joint ventures. By partnering with local companies instead of entering a market on their own, foreign firms can more quickly develop their ability to operate effectively in the host country. IJVs also provide a means for competitors within an industry to leverage new technology and reduce costs. In the auto industry, for example, Ford, General Motors, Daimler-Chrysler, Nissan and Renault formed an international joint venture, Covisint, in order to

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manage their supply chains using business-to-business e-commerce (Greenhalgh, 2001). Ford’s former CEO Jac Nasser explained the reasoning behind the formation of this IJV: “We see this technology [e-business] as so powerful that, for it to be optimized, we need it to become an industry standard. So, rather than have 15 different standards out there . . . we figured out that it would be more efficient if the basic architecture was common.” Assuming Covisint succeeds, it will fundamentally alter supply chain relationships within the automobile industry. For various reasons, managing IJVs successfully is difficult, and many ultimately fail. IJV failures often stem from poor management of human resource issues. Prior to formation of an IJV, human resource management professionals can help the potential partners assess their cultural compatibility. As the new entity is formed, recruiting and selecting of key executives to staff the IJV becomes critical. With the staff in place, HRM practices that align employees’ skills and motivations with the business objectives of the IJV can determine whether it ultimately achieves the desired outcomes (for an example of a model for strategic staffing in IJVs, see Petrovic & Kakabadse, 2003).

INTERNATIONAL MERGERS AND ACQUISITIONS (IM&AS) Companies today need to be fast, efficient, profitable, flexible, adaptable, future-ready and have a dominant market position. Without these qualities, it is virtually impossible to be competitive in today’s global economy. In addition to participating in strategic alliances to develop the capabilities they need to compete, many firms evolve and grow through mergers or acquisitions. Among the most significant transnational merger and acquisition deals in recent years are Daimler-Chrysler, Chase-J. P. Morgan, McKinsey-Envision, UBS-Warburg–Paine Webber, Credit Suisse-DLJ, Celltech-Medeva, SKB-Glaxo, NationsBank-Bank of America, Vivendi-Universal, Pfizer-Warner Lambert, Nestle-Purina, and Deutsche Telekom-Voice Stream. Although global economic and market conditions move up and down, the future appears ripe for a continuation of international merger and acquisition activity. In a merger, two companies agree to join their operations together to form a new company in which they participate as equal partners. In an acquisition, one firm buys controlling or full interest in another firm with the understanding that the buyer will determine how the combined operations will be managed. The majority of acquisitions are friendly – that is, the acquired firm solicits bids and enters into an acquisition voluntarily. Sometimes, however, a firm becomes a takeover target. Although mergers and acquisitions are technically different, it’s common


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to refer to all these means for combining the operations of two firms as mergers and acquisitions, or just M&As (Charman, 1999; Deogun & Scannell, 2001). Some observers argue that the increased pace of international mergers and acquisitions is a major driving force behind the development of multi-government agreements and rules for business conduct (Tyson, 2001). IM&A deals can have enormous economic and social consequences. They can quickly put the major competitors within a country out of business, and they can determine whether, how and where people work. Gaining government approval for international M&As is sometimes difficult, but the initial step of gaining approval usually proves to be far easier than successfully managing the new entity. As is true for international joint ventures, international mergers and acquisitions unfold through many stages. At each stage, success requires effectively managing many human resource (HR) issues. This involves identifying the HR issues and their implications for human resource management activities.

THE ROLE OF HUMAN RESOURCE MANAGEMENT Human resource management (HRM) refers to all of the dedicated activity that an organization uses to affect the behaviors of all the people who work for it (Jackson & Schuler, 2003). Because the behaviors of employees influence profitability, customer satisfaction and a variety of other important measures of organizational effectiveness, managing human resources is a key strategic challenge for all companies, and particularly so for those engaged in cross border alliances (Briscoe & Schuler, 2004). Every organization, from the smallest to the largest, engages in a variety of human resource management activities. Human resource management activities include formal policies and everyday practices for managing people. Policies are statements that offer a general statement of how people will be managed. For example, there may be a policy to reward employees for their performance to the organization. HRM practices then take the next step and provide offer a more specific statement of how people will be managed. For example, the practice of paying commissions based on individual sales performance is a practice that would be consistent with an HRM policy of rewarding employees for performance. Another practice that would also be consistent with this policy would be offering team-based incentives that are tied to the performance of a team against stated team goals. The more systematically HRM policies and practices are matched to the company, the more financially successful the company is likely to be (Becker, Huselid & Ulrich, 2001). This principle is as true for the successful management of cross-border alliances as is it for organizations in general. And, as is true for

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business in general, the stakes are high. Successful cross-border alliances make create new jobs, improve the economic conditions of a community, and produce wealth for shareowners. Conversely, failed cross-border alliances may mean lost jobs, loss of tax revenue, declining share values, and even the eventual demise of companies. In the remainder of this chapter, we describe some of the human resource issues that arise in CBAs and discuss their implications for a variety of human resource management activities (Briscoe & Schuler, 2004).

INTERNATIONAL JOINT VENTURES International joint ventures (IJVs) are legally and economically separate organizational entities created by two or more parent organizations that collectively invest financial as well as other resources to pursue certain objectives. IJVs are typically used when the required integration between the partners is high and the venture business is characterized by uncertainty and decision making urgency (Doz & Hamel, 1998). Although an overwhelming majority of international joint ventures involve only two parent firms (one from a foreign country and the other from the local country), some ventures may consist of multiple participants. Joint ventures that are launched by home-country based (foreign) and host-country based (local) firms are the dominant form of joint venture partnership. Because the creation of an IJV involves establishing an independent organization, the need to establish effective HR practices is particularly evident in this type of CBA.

REASONS FOR FORMING IJVs International joint ventures have become a major form of entry into global markets (Barkema, Shenkar, Vemeulen & Bell, 1997; Evans et al., 2002). Harrigan (1986), but there also are many other reasons that companies form IJVs. The most common reasons cited in the literature are: To gain technical and administrative knowledge, to learn, and to transfer that knowledge (Cyr, 1995; Lei, Slocum & Pitts, 1997; Mudambi, 2002); Host government insistence (Gomes-Casseres, 1989; Shenkar & Zeira, 1987); To gain rapid market entry and catch more customers (Berlew, 1984; Harbison, 1996; Shenkar & Zeira, 1987; Sparks, 1999); To capture increased economies of scale (Newburry & Zeira, 1997); To gain local knowledge and local market image and channel access (GomesCasseres, 1989; Harbison, 1996; Lasserre, 1983);


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To obtain vital raw materials (Shenkar & Zeira, 1987) or technology (GomesCasseres, 1989); To spread the risks (Pucik, 1988; Shenkar & Zeira, 1987); To improve competitive advantage in the face of increasing global competition (Porter, 1990); To support company strategies for internationalization (Evans et al., 2002). Of these, the reasons that appear to gaining substantial momentum are learning and knowledge, sharing and transfer (Child & Faulkner, 1998; Foss & Pedersen, 2002; Reid, Bussier & Greenway, 2000; Shenkar & Li, 1999). In many industries, increasing global competition and unabated technological advancement have resulted in a wide range of cross-border collaborative partnerships intended to access knowledge, skills, and resources that cannot be internally produced by organizations in a timely or cost-effective fashion. Organizational learning has long been considered a key building block and major source of competitive advantage (Badaracco, 1991). A global alliance is not only a means by which partners trade access to each other’s skills but also a mechanism for actually acquiring a partner’s skills. In bringing together firms with different skills, knowledge bases, and organizational cultures, IJVs create unique learning opportunities for the partner firms. By definition, alliances involve a sharing of resources. This access can be a powerful source of new knowledge that, in most cases, would not have been possible without the formal structure of an IJV. As such, IJVs are no longer a peripheral activity but a mainstay of competitive strategy. IJVs forge new knowledge transfer pathways, across both technologically and traditionally linked positions. Using and relying on external learning and knowledge transfer is challenging and complex (Barkema et al., 1997; Mudambi, 2002). A fundamental impediment to inter-partner learning and knowledge transfer originates from the nature of knowledge involved. Codified explicit knowledge is generally transparent and readily accessible and transferable; but many elements of knowledge transferred between IJV partners are tacit. Tacit means that the knowledge is deeply embedded in organizational routines (e.g. structure, rules, and policies) and difficult to codify and teach. In organizations, tacit knowledge involves intangible factors embedded in personal beliefs, experiences, and values. It is also stored organically in team relationships. If two firms seek transfer of the knowledge that is explicitly codifiable (e.g. patents), they normally choose international licensing instead of the IJV. When the knowledge is tacit, thus uncodifiable in the license contract, the IJV becomes a better device for transferring or sharing this type of knowledge. Certainly, behaviors and styles of managers in organizations have a significant impact on the ability and willingness of a firm to learn (Frayne & Geringer, 2000).

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For example, learning requires managers to be open and willing to suspend their need for control. While firms and individuals need the ability and willingness to learn as they enter into the IJV formation process, they also need to be transparent so that others may learn as well (Child & Faulkner, 1998; Hamel, 1991). Thus both partners need to have similar qualities that support learning if the partnership is to have a longer-term success (Doz & Hamel, 1998; Hamel, 1991; Lyles, 1987; Parkhe, 1991; Pucik, 1988). Because learning capability can quickly lead to attaining competitive advantage (Prahalad & Hamel, 1990), asymmetry in learning capability can soon lead to partnership instability and dissolution.

FOUR STAGE MODEL OF IJVs As introduced earlier, the organizational and human resource issues in IJVs are clearly very extensive (Child & Faulkner, 1998). They, however, can be further refined and categorized into several stages, stages that begin with the development of the IJV itself (Evans et al., 2002; Lei, Slocum & Pitts, 1997; Lorange & Roos, 1992; Makhija & Ganesh, 1997; Pucik, 1988; Schuler, 2001). The four stages of the IJV process include: (1) (2) (3) (4)

Formation: The partnership stage Development: The IJV itself Implementation: The IJV itself Advancement: The IJV and beyond

These four stages include activities that begin even before the IJV itself is formed and concludes with the relationship among the three entities, two partners and one IJV. The HR issues in each stage of the IJV process are numerous as illustrated in Fig. 1.

MANAGING HUMAN RESOURCES IN IJVs As summarized in Fig. 1, the formation and operation of an IJV raises many HR issues that have implications for how the partners (the IJV parents and the IJV itself) manage their human resources. Many of these implications are grounded in the assumption that IJV parents and the IJV itself are all interested in learning (Parkhe, 1991). Organizations can support learning, knowledge flow, sharing and transfer by ensuring that their employees possess and exhibit role behaviors such as:


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Fig. 1. Four Stage Model of HR Issues in International Joint Ventures. Source: R. S. Schuler, S. E. Jackson, and Y. Luo, Managing Human Resources in Cross-Border Alliances (Routledge Publishing, 2004). Used with permission.

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Openness; Systemic thinking; Creativity; Self-confidence; Empathy.

The parent and the IJV benefit from human resource management practices that support and reinforce these role behaviors (Jackson & Schuler, 2000, 2003; McGill, Slocum & Lei, 1992).

MANAGING HUMAN RESOURCES IN IM&As International mergers and acquisitions represent the end of the continuum of options companies have in combining with each other. Representing the least intense and complex form of combination is licensing. Next come alliances and partnerships and then joint ventures. Mergers and then acquisitions conclude the combination options. In a merger, two companies come together and create a new entity. In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs. Many companies seem to be confronted with the need to do mergers and acquisitions, yet the odds of doing so successfully are relatively low. These odds can be increased, however: firms that have gained more experiences and that take a systematic approach to learning from experiences in their deal making are more likely to be successful (Arndt, 2000; Ashkenus, DeMonaco & Francis, 2000; Fendt, 2002a). As part of their systematic approach to completing successful IM&As, managers pay attention to HR issues that exist throughout the stages of international mergers and acquisitions. On the other hand, with there being more IM&As overall, there are more inexperienced executives, too. Inexperienced executives are less proactive, tend to underestimate HR issues and therefore not to involve HR or only late in the process (Fendt, 2002b; Levinsohn, 2002). The key HR issues that arise in IM&As vary somewhat depending on the specific circumstances or type of IM&A under consideration. Some mergers are “mergers of equals.” Examples of these include the merger between Citicorp and Travellers forming Citigroup; and between Ciba-Geigy and Sandoz forming Novartis. Other mergers take place between firms that are clearly unequal – at least in total size and market value. Similarly there are various types of acquisitions, e.g. those involving acquisition and integration such as those typically made by GE, Siemens and Cisco Systems; and those involving acquisition and separation such as between Unilever and Bestfoods. There are also friendly acquisitions


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and hostile acquisitions, although cross border hostile acquisitions are relatively rare (Evans et al., 2002). Acknowledging the different types of mergers and acquisitions is necessary in order to understand the many different HR issues that arise in IM&As. For example, a merger of equals often compels the two companies to share in the staffing implications, whereas a merger of unequals results in the staffing implications being shared unequally (Kay & Shelton, 2000). In this chapter, we can barely briefly touch on the HR issues associated with the different types of IM&As (for a more complete discussion, see Schuler, Jackson & Luo, 2004). In addition, the HR issues to be addressed in IM&As may differ depending on the objectives behind the deal. Among the numerous reasons for companies to merge or acquire are these: To Promote Growth; To Manage Technology; As a Response to Government policy; To Take Advantage of Exchange Rates; As a Response to Political and Economic Conditions; Reduce Labor Costs and/or Increase Productivity; To follow clients; To Diversify and Manage Risk; To Achieve Greater Vertical Integration; As a response to shareholder and/or analyst pressure for growth, innovation, internationalization, etc. In recent years, people-related reasons have become more common and with industrialized countries’ dramatically aging population until 2020, this motive is likely to increase in significance: for example, engineers and scientists are in high demand worldwide and as this demand will go up, the supply will go down (Prognos World Report, 2001). In industries where intellectual capital is critical to business success, as it is for semiconductor and optical networking firms, technically skilled employees are seen as more valuable than the company’s product. Some banks even make dollar estimates of the value of a firm’s employees, e.g. by applying metrics like price-per-engineer. When Broadcom bought chipmaker SiByte, it can be said to “have paid $18 million per engineer” (Creswell, 2001). Of course, such deals can only be successful if the employees in the target firm agree to stay after the deal is completed. Retaining talent after any merger or acquisition can be difficult. It may be even more difficult when employees in the target firm are expected to shift from working for a well-regarded domestic firm to working for a foreign-owned company, which may have less status or prestige or is simply unknown.

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Next, we describe a simple three-stage model of the IM&A process and use it to outline several HR issues that arise during IM&As. This model provides the foundation for developing propositions regarding how effective human resource management can contribute to IM&A success.

THREE STAGE MODEL OF MERGERS AND ACQUISITIONS Figure 2 summarizes the HR issues to be addressed in three stages of the IM&A process. The three stages shown are: (1) pre-combination; (2) combination and integration of the partners; and (3) solidification and advancement of the new entity (Evans et al., 2002; Habeck, Kroger & Tram, 1999; Schuler & Jackson, 2001). These three stages are applicable to most of a firm’s business functions (finance, marketing, distribution, IT, manufacturing, etc.), but we highlight here only the issues that are most closely associated with managing human resources.

Stage 1: Pre-combination The pre-combination stage includes all of the activities that occur before the IM&A is completely legally. Thus it includes the process of determining the reasons for becoming involved in a merger or acquisition (as a buyer or a target), searching for possible partners (whether domestic or international), evaluating the alternatives, selecting and negotiating with a specific partner, and planning for the eventual implementation of the deal. In many respects, these activities are quite similar to those conducted during the Formation Stage of an IJV. The activities in Stage 1 establish a foundation for stages 2 and 3. For example, in order for Stage 2 to be effective, it is important that the partners have already carefully planned and prepared for it during in Stage 1. According to some estimates, lack of integration planning is found in 80% of the IM&A’s that under-perform (Habeck et al., 1999). A key HR activity in Stage 1 is the performance of a HR due diligence. The HR due diligence process should assess the human capital of an organization. It is, however often carried out by lawyers and financial experts focusing on financial costs and contractual obligations. If HR is involved in this process it will go beyond to give insight in how much a business is supported by its human capital, what culture drives the company and how does it impact on performance, what added value is the human capital capable of creating in a merger and how can it best be released and developed (Daniel & Metcalf, 2001; Devine, 2002).


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Fig. 2. HR Issues in Three Stages of IM&As. Source: R. S. Schuler, S. E. Jackson and Y. Luo, Managing Human Resources in Cross-Border Alliances (Routledge Publishing, 2004). Used by permission.

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Stage 2: Combining and Integrating the Companies The stage of combination and integration begins after a merger or an acquisition is announced and pre-combination activities are completed. The general approach used to integrate and combine IM&A firms can be characterized as fitting one of four approaches: portfolio, blending, new creation, and assimilation (Schuler et al., 2004). In the portfolio approach, managers in the two companies retain a great deal of autonomy. Although the alliance creates legal and economic interdependencies, the top management team assumes that the two organizations will continue to operate more or less as they had operated prior to the IM&A. Presumably, the strategic value of the alliance does not lie in the integration of the separate organizational systems, so differences are “managed” by maintaining segregated organizations. This scenario often occurs when one firm acquires another firm as a pure investor or in order to diversify into another business or region and then allows the acquired firm to operate as a relatively autonomous subsidiary. The blending scenario arises when top managers intend for the two organizations to come together or merge into a new organization that retains the best aspects of the original partners. In this scenario, the intent is to manage diversity through integration, with members of each organization adapting to the procedures and culture of their alliance partner. The blending approach is perhaps most common in IM&As that occur within an industry and between firms that are believed to complement each other’s strengths and offset each other’s weaknesses. But surely management style, organization, and market share could have been improved without a merger? “No,” Vasella replies. “The merger was the trigger we needed to rethink our focus and re-challenge ourselves. We needed to create a whole new corporate culture. The creation of a new company with a new name committed to innovation gave us a competitive advantage” (Hanes, 1999). A third scenario arises when the partners agree to create a new firm that is truly different from either of the original partners. As we have already seen, this is typically what partners agree to do when then enter into a joint venture, especially if the IJV is located in a country other than the countries of the parent firms. Creating a new organization is the goal of some mergers also, although it seems to be less common. One indication that an IM&A is intended to form a new creation is that the resulting firm takes on a completely new name. Novartis, which was created through a merger of Sandoz and Ciba-Geigy, is one example. Although it is not strictly speaking an international M&A, cultural differences of these two global life science players were important.1 Having experienced a merger of similar size in 1970 with Ciba and Geigy and having seen that for two decades people tended to blame “those of Ciba” or “those of Geigy,” the merging partners set out to do it right


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this time. They focused strongly on culture from the start and spared no effort to create a totally new culture from day on. The name Novartis, describing the innovation focus of the new organization and bearing no association with either of the previous names should be its symbol. No energy should be lost with turf wars. Rather should all efforts be focused on the common project: “(. . .) is like having a child: Each parent looks for resemblances in the eyes and face. But the child has its own identity. Both sides will need to step back a bit and not impose their own culture on it” (Smith, 2000). Finally, in some acquisitions, the buyer clearly intends to take over and control the target. Typically General Electric and Siemens do this with many of their acquisitions (Javidan, 2002). Such experienced integrators use proven integration processes which they regard as critical growth competencies. Consequently, they invest time, people, and resources to develop the processes, functions and responsibilities, checklists and full-time integration managers long before IM&As occur (Bogan & Symmers, 2001). The target firm may be an attractive candidate for an acquisition because it has some valuable assets, yet for various reasons it is clear that it cannot survive on its own. In this scenario, the expectation is that the target firm will lose its identity and adopt the management practices of the acquiring firm. In other words, the target firm is expected to assimilate into the acquirer such as what happened when Deutsche Bank acquired Bankers Trust (Atlas, 2002). This is also what happened in Pfizer’s hostile take-over of Warner-Lambert. When Pfizer acquired Warner-Lambert, they adopted a few of Warner-Lambert’s practices, but observers say that little of the Warner-Lambert culture remains today. Not surprisingly, most of Warner-Lambert’s top-level managers left the firm. Regardless of the specific approach, all acquisitions require some degree of integration of systems and processes in order to achieve key synergies. Successful integration is a key challenge in Stage 2 of IM&As. If the firms don’t succeed in integrating their activities, the results are predictable. According to recent studies, poor integration accounts for declining productivity, leadership attrition, low employee morale, and failure to meet financial goals (Bobier, 2000). Because Johnson & Johnson engages in so many mergers and acquisitions, they have been able to study their own experiences and learn from the successes and failures. This company’s research clearly indicates that a systematic, explicit integration process is at the heart of successful mergers or acquisitions. Furthermore, J&J has learned the importance of tailoring decisions about how to approach the task of integration to take into account the specific strengths and weaknesses of the acquired company. J&J has also learned that Stage 2 should proceed as quickly as possible – the sooner the process begins, the better. Ideally, decisions about the management structure, key roles, reporting relationships,

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layoffs, and restructuring should be announced within days of signing. Creeping changes, uncertainty, and anxiety that last for months are debilitating and drain value from an acquisition (Bobier, 2000).

Stage 3: Solidification and Assessment of the New Entity As an IM&A takes shape, it faces issues of readjusting, solidifying and finetuning. These issues take on varying degrees of intensity, although not importance, depending upon the approach to integration that the firms adopt. The intensity can be quite high for an international merger of equals that is intended to lead to the creation of a new entity, and failure to address the HR issues effectively is likely to mean that the intended strategy is never successfully implemented. For DaimlerChrysler, Stage 3 lasted more than two years (Muller, Green & Tierney, 2001). During that time, they grappled with all of the HR issues listed under Stage 3 in Fig. 2. Like IJVs, effectively managing international mergers and acquisitions requires dealing successfully with many significant HR issues. Each stage of the IM&A process presents new challenges as well as new opportunities to create value by managing people effectively (Briscoe & Schuler, 2004).

CROSS-BORDER TRAINING AND DEVELOPMENT INITIATIVES FOR IJVs AND IM&As As the above discussion suggests, there are many HR issues to manage in IJVs and in IM&As. One such issue is improving the cross-cultural competencies (e.g. knowledge, skills and abilities) of IJV and IM&A employees to help them adjust to new cultural environments and to help them interact and work effectively with people from a variety of cultures. In the remainder of the chapter we describe how two human resource management practices, cross-border training initiatives (CBTIs) and cross-border development initiatives (CBDIs), can be used to improve the cross-cultural competencies of IJV/IM&A employees. CBTIs and CBDIs refer to all activities or interventions that are planned to improve the cross-cultural competencies of IJV/IM&A employees. CBTIs are generally used to improve cross-cultural competencies needed today or very soon. Usually, the main objective of CBTIs is to improve performance in a specific job by increasing employees’ knowledge and skills. Examples of CBTIs include cross-cultural training (Black & Mendenhall, 1990), diversity training (Ferdman & Broady, 1996), language training (Dowling, Welch & Schuler, 1999), self


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management training (Frayne & Geringer, 1992), and mentoring (Dowling, Welch & Schuler, 1999). In comparison, CBDIs are generally used to improve cross-cultural competencies over a longer period of time. The major objective of CBDIs is to provide employees with knowledge, skills, and abilities that are needed for future job assignments. Some of the common types of CBDIs include management education programs (Bailey & Shenkar, 1993), participation in global teams (Gupta & Govindarajan, 2002), immersion experiences in foreign cultures (Gupta & Govindarajan, 2002), immersion experiences in various ethnic communities (Noe, 2002), team building workshops (Evans, Pucik & Barsouk, 2002), international job rotations (Dowling, Welch & Schuler, 1999), and coaching (Noe, 2002).

CBTIs AND CBDIs IN IJVs As shown in Fig. 3 the opportunities for training and development activities in an IJV are many – they can focus on at least six groups of employees each having somewhat different cross-cultural competency requirements (see Bailey & Shenkar, 1993; Zeira & Shenkar, 1990 for a detailed discussion on the various employee groups in an IJV). The different groups who can benefit from CBTIs and CBDIs are: (1) (2) (3) (4) (5) (6)

Foreign parent expatriates; Third country expatriates of the foreign parents(s); Third country expatriates of the host parent(s); Third country expatriates of the new venture; Host parent transferees; and Host country nationals (see Fig. 3 for definitions).

The different IJV employee groups highlight the complexity of issues related to designing, delivering, and evaluating CBTIs and CBDIs for IJV employees (Tarique & Caligiuri, 2003). For example, should all IJV employees receive cultural general knowledge and/or culture specific knowledge? How will CBTI for third country expatriates of the foreign parents(s) differ from CBTI for third country expatriates of the host parent(s)? Clearly, a full discussion of how an IJV can address these issues is not feasible here. Instead we briefly discuss generic training and development issues that can be applied across the various IJV employee groups. IJV employees in the first four groups are mostly expatriates (see Fig. 3) who require knowledge-based competencies to effectively work in new and different cultural environments. Knowledge based competencies include cultural general

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Fig. 3. Cross-Border Training and Development Initiatives for Various Employee Groups in an IJV. Note: 1 Based on Baily and Shenkar (1993). 2 Portions based on Schuler (2001), and Bailey and Shenkar (1993). 3 Portions based on Bailey and Shenkar (1993), Kealey and Protheroe (1996), Schuler (2001), Gupta and Govindarajan (2002), Evans, Pucik and Barsouk (2002), and Noe (2002).


Fig. 3. (Continued )

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knowledge, cultural specific knowledge, and intracultural knowledge. These three types of knowledge provide expatriates with a good framework for understanding how cultures differ and how to effectively interact with people from a variety of cultures (Harrison, 1994) and ethnic groups. CBTIs like cross-cultural training and diversity training can provide the required level of cultural general knowledge, cultural specific knowledge, and intracultural knowledge. In addition CBDIs such as immersion experiences in foreign cultures, immersion experiences in different ethnic communities, participation in global teams, and coaching may provide the appropriate level of cultural general knowledge, cultural specific knowledge, and intercultural knowledge if the goal is to prepare IJV employees for assignments they may have in the future. IJV employees in group 5 and group 6 are considered host country nationals who require cultural general knowledge to effectively work with expatriates and require intracultural knowledge to effectively work with a diverse workforce within the IJV. CBTIs like cross-cultural training and diversity training can provide the required level of cultural general knowledge and intracultural knowledge. CBDIs like immersion experiences in different ethnic communities and coaching may also provide the appropriate level of cultural general knowledge and intracultural knowledge. IJV employees can further be classified as core or non-core. Core IJV employees are those whose job tasks are central to the continued success of the IJV. These employees are usually found in leadership positions such as an IJV manager (see Frayne & Geringer, 1992) and, in general, are responsible for the day-to-day operations of the venture. For core IJV employees, skill based competencies include local language skills, knowledge transfer skills, interpersonal skills, communication skills, negotiation skills, and relationship building skills. Ability based competencies include learning ability and listening ability. While CBTIs like cross-cultural training may provide some level of skills and ability based competencies, that is not the typical goal of CBTIs. CBDIs are more appropriate, and interventions like coaching and management education programs may provide the required level of skills based competencies and ability-based competencies.

CBTIs AND CBDIs IN IM&As Similar to Bailey and Shenkar’s (1993) approach of categorizing IJV employees, IM&A employees can be categorized using two criteria: (1) country of origin; and (2) pre IM&A affiliation. Figure 4 shows the three key IM&A employee groups based on theses two criteria. These groups are:


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Fig. 4. Cross-Border Training and Development Initiatives in an IM&A. Note: 1 Portions based on Bailey and Shenkar (1993). 2 Portions based on Schuler and Jackson (2002). 3 Portions based on Kealey and Protheroe (1996), Gupta and Govindarajan (2002), and Noe (2002).

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(1) Foreign partner expatriates (employees from the foreign partner organization who are nationals of the foreign partner’s home country); (2) Non partner expatriates (Employees recruited directly by the IM&A who are nationals of neither the foreign partner’s home country nor the host partner’s home country); (3) Host partner employees (Employees from the host partner organization who are nationals of the host partner’s home country). IM&A employees in the first two groups are mostly expatriates (see Fig. 4) who require knowledge-based competencies to effectively work in new and different cultural environments. Knowledge based competencies include cultural general knowledge, cultural specific knowledge, and intracultural knowledge. These three types of knowledge provide foreign partner expatriates and non partner expatriates with a good framework for understanding cultural differences and the influence of these differences on interactions with people from a variety of cultures (Harrison, 1994) and ethnic groups. CBTIs like cross-cultural training and diversity training can provide the required level of cultural general knowledge, cultural specific knowledge, and intracultural knowledge. In addition CBDIs such as immersion experiences in foreign cultures and in different ethnic communities, and participation in global teams may provide the appropriate level of cultural general knowledge, cultural specific knowledge, and intracultural knowledge if the goal is to prepare IM&A employees for future assignments. IM&A employees in the third group (e.g. host partner employees) require cultural general knowledge to effectively work with foreign partner expatriates and non-partner expatriates. In addition, host partner employees require intracultural knowledge to effectively work with a diverse workforce in the new IM&A. CBTIs like cross-cultural training and diversity training can provide the required level of cultural general knowledge and intracultural knowledge. CBDIs like immersion experiences in different ethnic communities may provide the appropriate level of cultural general knowledge and intracultural knowledge. IM&A employees in each group can further be classified into core and non-core employees. Core IM&A employees are those whose job tasks are central to the continued success of the IM&A and are usually found in leadership positions. These employees are responsible for providing structure and strategy, managing the change process, retaining and motivating key employees form variety of cultural and ethnic background, and communicating with all stakeholders (Schuler & Jackson, 2003). The core/non-core classification has implications for skills based competencies and ability based competencies in that the competencies required to perform essential tasks will vary depending on whether the employee’s job tasks are central to the continued success of the IM&A. The required skills


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based competencies for core IM&A employees include flexibility, and visionary skills. Ability based competencies needed by core IM&A employees include ability to recognize the relative strength and weaknesses of both companies, good listeners, and the ability to filter out distractions and focus on integrating key business drivers such as R&D and customer interfaces (Schuler & Jackson, 2003). CBTIs like mentoring may provide the required level of skills and ability based competencies. CBDIs like management education and team building workshops, however, may be used to provide the appropriate level of skills and ability based competencies if the competencies are needed in some future job assignments.

CROSS-CULTURAL TRAINING IN IJVS AND IM&As As shown in Figs 3 and 4, cross-cultural training is one type of CBTI that can be used across most employee groups. Cross-cultural training is defined as “any planned intervention designed to increase the knowledge and skills of expatriates to live and work effectively and achieve general life satisfaction in an unfamiliar host culture” (Kealey & Protheroe, 1996, p. 145) and has become a major form of training used by organizations (Tarique & Caligiuri, 2003). There are many reasons that IJVs and IM&As can use cross-cultural training. The most common reasons include: Improving cultural sensitivity by increasing knowledge and appreciation about a new country and its culture and by increasing awareness of the norms and behaviors needed to be successful in a new culture (Black & Mendenhall, 1990; Kealey & Protheroe, 1996); Improving cross cultural skills by increasing communication skills, transition skills, negotiation skills, leadership skills, and management skills (Kealey & Protheroe, 1996). An important aspect of any cross-cultural training initiative involves determining how cross-cultural training effectively enhances an IJV/IM&A employee’s cross cultural competencies, facilitates his/her adjustment to the new cultural environment, and improves his/her performance. Cross-cultural training literature suggests that it is important to follow a systematic approach to designing cross-cultural training initiatives to improve the effectiveness of cross-cultural training initiatives (see Tarique & Caligiuri, 2003 for a through description of the entire systematic approach). Based on Tarique and Caligiuri’s (2003) five-phase systematic approach to designing cross-cultural training initiatives, a well-designed cross-cultural training initiative in an IJV/IM&A would involve:

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(1) Identifying the type of IJV employee (e.g. foreign parent expatriate and third country expatriate of the foreign parent) or IM&A employee (e.g. foreign partner expatriate and non partner expatriate). (2) Determining the specific cross-cultural competency need such as knowledge based competencies (e.g. cultural general knowledge), skills based competencies (e.g. interpersonal skills), and ability based competencies (e.g. learning ability). (3) Establishing short-term and long-term learning goals and measures for determining short-term and long-term cross-cultural training effectiveness. (4) Developing and delivering instructional content. (5) Evaluating whether the cross-cultural training program was effective.

CONCLUSION There are a significant number of HR issues in IJVs and in IM&As. Although different HR issues take priority during the four stages of IJV and the three stages of IM&As, a common objective in all stages is to anticipate and manage change, and to learn from experience. In addition, although it has not been a central theme in this chapter, managing cultural differences is a key HR issue for IJVs and IM&As, as it is for any CBA. These issues and many others associated with managing human resources in international mergers and acquisitions and international joint ventures are described in great detail elsewhere (Schuler, Jackson & Luo, 2004). With the vast number of HR issues involved in IM&As and IJVs, the HR profession has a great opportunity to make significant contributions to the organization. The value and effectiveness of these contributions are likely to be greatly enhanced through a partnership between the HR professionals, line managers, employees and all other significant stakeholders (Jackson & Schuler, 2003).

NOTE 1. Daniel Vasella: “We [Ciba Geigy and Sandoz] had very different corporate cultures even though we were in the same town, separated only by a river. Companies can have substantial differences even if they are physically very close in proximity. Of course, there are also national differences. For example, one of my colleagues (a German in the U.S.) went with another colleague to a football game. His colleague was coaching and the gentleman’s son was shooting the ball and couldn’t score. My colleague thought, “What a poor shot!” while the American said, “Great try, Johnny!” I felt that this was such a wonderful example of the difference in attitude that I saw between Americans and Germans: one focuses on the effort and the possibilities for the next time, while the other thinks first about critique” (Fuld, 2000).


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A REPUTATIONAL PERSPECTIVE ON MERGERS Gary Davies and Rosa Chun INTRODUCTION Most mergers and acquisitions fail to achieve their financial objectives (Buono & Bowditch, 1989; Cartwright & Cooper, 1996). For example, only 12% of a sample of mergers and acquisitions managed to accelerate their average revenue growth significantly over the three years after the companies came together (Bekier, Bogardus & Oldham, 2001). Yet there is no consensus as to the causes of this lack of success, which is surprising, particularly after the thousands of mergers that have occurred in the past and the acceleration in merger and acquisition activity up until recent times. The reasons given for failure often draw on a financial perspective, for example, that too high a price was paid by the aquisitor (Daniel & Metcalf, 2001). But such explanations may cover other, more useful, insights into how mistakes can be avoided in the future and how the chances of success can be enhanced. Non-financial explanations for failure include the problems of amalgamating two organizations and two cultures (Buono & Bowditch, 1989; Cartwright & Cooper, 1996). One manager we interviewed recently could have been summarizing such work when he said, “We analyzed their accounts and undertook due diligence but we wish now we could have audited their culture too!” We believe that the significance of these words goes beyond the idea of assessing a company’s culture as part of the decision on whether to purchase or merge and to the use of the word “their.” Note the manager did not say, “the difference between their


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culture and ours.” The problem was with “their” culture and, presumably, the problems “they” caused when the two organizations were put together. We do not however believe from our own research that the problem is simply that of a match or a mismatch in culture before the merger. In the post-merger stage, firms tend to focus on the mechanics of internal integration, rather than on the dynamics of psychological integration (Marks & Mirvis, 2001). We believe the real problem can lie in the perceptions the two merging organizations have of each other before, during and after the merger. The perceptions we hold of an organization are often referred to as its “reputation” and that is the perspective we are adopting.

A REPUTATIONAL PERSPECTIVE The term reputation means different things to different people. Some see reputation as denoting financial or market performance. For an economist, a firm’s reputation is a market signal to its competition, which in turn is reflected in its share price and market share. For an accountant, reputation, as an intangible asset, is represented by the financial value associated with the corporate name. This is particularly relevant in an acquisition where a premium can be paid for the firm’s intangibles assets, of which reputation is one. Studies of the links between reputation and performance tend to investigate the relationships between favorable reputation attributes (e.g. social responsibility) and investor behavior or financial performance, relying upon Fortune Magazine’s annual survey data (America’s Most Admired Survey) for a measure of the strength of reputation (e.g. Fombrun & Shanley, 1990; Fryxell & Wang, 1994; Hammond & Slocum, 1996; Rao, 1997; Srivastava, Mclnish, Wood & Capraro, 1997). The key audiences here are external stakeholders such as shareholders, senior managers or investment analysts whose main interests are the firm’s financial attributes. Our concerns here are for the managers and employees of the firm who are engaged in its day-to-day activities.

Perception is Reality Our perceptions become our reality and understanding, and such a view has been a key issue in reputation research. While the rationalist views and models reputation with a focus on financial performance, a notion of “perceived” reputation became increasingly popular in the 1990s. Studies that have taken this approach tend to focus on the perceptions of external stakeholders, “how others see us,” for example how the media (e.g. Deephouse, 1997), buyers’ or customers’

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(e.g. Yoon, Guffey & Kijewski, 1993) views affect reputation. In the marketing literature some use reputation as being synonymous with “image” (e.g. Weiss, Anderson & Maclnnis, 1999). In the organizational behavior literature a common focus is on “construed external image,” the way organization members believe others see their organizations (e.g. Dutton & Dukerich, 1991). Reputation is created through all the interactions we have with the organization and all that we are told about it. An external stakeholders’ perception of reputation is also affected by any reputation inherited from a stereotyped image of the firm’s country of origin and the industry it is in. When it comes to reputation organizations can suffer from “original sin.” Thus all German companies will share the same stereotype to a greater or lesser extent that they are efficient producers of quality products, while all oil, lottery and tobacco companies will carry some reputation of being potentially bad for society and the environment. Thereafter we use our own direct experience and the communication to us of the experience of others to create a more objective view, but one that may be filtered or influenced by our initial stereotyping.

Members’ Emotions Towards a Merged Reputation Prior to any merger the employees of both organizations will form or develop an image of the other organization. This could well include a stereotyping of “them” and, where the two organizations are in competition, it would be natural to expect some negative connotations to colour perceptions. How we see ourselves, and how we see “them,” will influence our attitude to any merger. There has been however less interest in measuring employees’ views of a firm’s reputation than that of customers. Internal perspectives of a firm’s reputation have focused mainly on the views held by management (e.g. Gioia & Thomas, 1996). Recently there have been studies of the interaction between the two key stakeholders in any organization, customers and employees. Davies and Chun (2002) argue that employees’ views can influence customers’ views particularly in services organizations. In a merger situation, a priority should then go to managing employees’ perceptions, as their feelings, for example of insecurity, may spill over onto external stakeholders. A firm’s reputation, residing in members’ cognition, tends to be complex, fluid, fragile and interactive rather than rigid, enduring and receptive to change. Companies with strong reputations can be immune from crises caused by mismanagement of stakeholder perceptions and emotions. In a merger situation, employees tend to keep their own views of their company as a defence mechanism allowing them to cope with layoff stress and separation anxiety (Astrachan, 1995). A strong reputation acts as a reservoir of goodwill; we will trust and believe in

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firms with a strong reputation, rationalising any inadequate actions. Conversely any firm with a poor reputation is less likely to be trusted and believed. What they do or say will be treated with suspicion. There are many reasons why we should be interested in measuring the reputation of firms and doing so in the context of a merger. In this study, we take reputation as a collective and multidimensional construct representing the accumulated perception of a stakeholder has of an organization (e.g. Fombrun, 1996). For the purpose of analyzing a merger situation, we focus mainly on the internal stakeholders’ views (employees and management) of their firm’s reputation.

MEASURING REPUTATION There are a number of possible strategies towards measuring corporate reputation. Respondents can be asked to rate the reputation of a firm from poor to good (Goldberg & Hartwick, 1990). Such direct measures do not explain why one firm should have a better or poorer reputation than another. A number of measures of corporate reputation exist focusing on the ranking of corporations. Such measures have been criticized because the criteria for assessment have no theoretical foundation, are overly focused on financial performance and because the sample universe for reputation surveys is normally that of executives and business analysts (Fryxell & Wang, 1994). Here we are trying to understand and measure the complex phenomenon that is the reputation of an organization. Metaphor is often useful to make what is complex accessible for researcher and respondent alike (Black, 1962). The device of equating the company with a person is a way of aiding an understanding of the reputation concept using something with which we are more familiar (Morgan, 1986). Our approach has been to use the personification metaphor to assess reputation and to use a scale derived from this perspective to assess “corporate personality” as a measure of reputation (Davies, Chun, daSilva & Roper, 2003). Like a person, an organization can be said to have a personality, and when the personality is embedded in an individual/organization it becomes its character. Using personality traits, the scale measures reputation of an organization by asking respondents to imagine that the organization has “come to life as a person” and to assess it using a “personality scale.” The scale was developed and validated for the measurement of both internal and external perspectives of reputation in a large empirical study. The structure of the measure and its items are given in Table 1. A five point Likert scale (anchored on 1 = strongly disagree that the item describes the organization to 5 = strongly agree that it does) is used to measure each item.


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Table 1. The Corporate Personality Scale: Dimensions, Facets and Items. Dimension

Facet

Items

Agreeableness

Warmth Empathy Integrity

Cheerful, pleasant, open, straightforward Concerned, reassuring, supportive, agreeable Honest, sincere, trustworthy, socially responsible

Enterprise

Modernity Adventure Boldness

Cool, trendy, young Imaginative, up-to-date, exciting, innovative Extrovert, daring

Competence

Conscientiousness Drive Technocracy

Reliable, secure, hardworking Ambitious, achievment oriented, leading Technical, corporate

Chic

Elegance Prestige Snobbery

Charming, stylish, elegant Prestigious, exclusive, refined Snobby, elitist

Ruthlessness

Egotism Dominance

Arrogant, aggressive, selfish Inward-looking, authoritarian, controlling

Informality Machismo

None None

Casual, simple, easy-going Masculine, tough, rugged

The scale has seven dimensions and 16 facets (including the two minor dimensions). We have argued that the scale is best seen as a diagnostic tool. Organizations do not in reality have personality or character, but we can learn about the perceptions people have of an organization by pretending that they do. The scale is therefore an indirect measure of reputation, one that uses the metaphor of organization as person to allow respondent and researcher to articulate the complexity that is reputation. Our research has led us to the view that how members of an organization perceive the two organizations that constitute the merger can provide a useful explanatory framework for researchers and managers alike. Our main aim in this chapter is then to illustrate how a reputational perspective can complement existing approaches to assessing and managing a merger. We report on the results from three studies.

THREE CASE STUDIES The three cases involve two mergers that had taken place some years before we took our measurements and one where the merger was planned but had still to occur.

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Case 1: A Tale of Two Banks and Three Reputations: A Successful Case Two High Street banks had merged. Management had taken time to think about the merger and had appointed joint committees to identify, for example, issues and produce answers to the problems they expected. Some rationalization of the two branch networks had been expected and had taken place before our study began, some six years after the two organizations had become one. Although Bank A had in effect acquired Bank B, the new corporate name incorporated both names in the new corporate identity and logo. Management had anticipated some difference in culture as the two merging banks had somewhat different heritages and customer bases, one was seen as more up-market than the other. Specific issues had to be resolved: how to merge two somewhat different Information Technology systems and what products to retain from the two portfolios. Middle managers on a management development program were asked to complete our questionnaire where they had to imagine the merged entity had “come to life” as a person and to rate its personality. Some six years after the actual merger, the organization looked from the outside at least as if it had become a single entity. We wanted to test this view. Managers were also asked about their backgrounds and specifically which bank they had worked for prior to the merger or whether they had joined the organization after the merger date. Figure 1 presents a profile for the averaged responses. An average mark of three would

Fig. 1. The Merger of Two Banks. Note: Figures represent the average score for each dimension (1 Strongly Disagree to 5 Strongly Agree, with 3 Neutral).


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Table 2. Dimension Agreeableness Enterprise Competence Chic Ruthlessness Informality Machismo

Bank A

Bank B

New Joiners

3.39 2.47 4.15 3.01 3.23 2.31 3.23

3.47 2.74 4.02 3.07 3.17 2.44 3.31

3.27 2.25 4.13 3.22 3.79 2.25 3.33

Note: Data for Fig. 1.

indicate that the average for all items constituting a particular dimension would be the midpoint of our five-point Likert scale. We expected to see some differences between the views of those from each of the two banks. We also expected to see the views of new arrivals to fall between these two, as we expected newcomers to have a view that was influenced by both groups (Table 2). Figure 1 suggests our respondents saw their bank as Competent (reliable, leading, corporate) and Agreeable (pleasant, supportive, honest) but also Ruthless (arrogant, controlling). Respondents from the three different backgrounds shared very similar views of the bank on the 7 reputation dimensions except for Ruthlessness and Enterprise where the new joiners had more negative views. The results were presented back to the managers who had completed the survey in a number of discussion groups. Managers who had worked for either of the two merged banks tended to focus particularly on the Ruthlessness dimension, challenging the scores. Others expressed surprise at how close the scores were from the perspectives of the groups from either bank, arguing that systems and procedures in both banks had been very different and that some issues still remained unresolved some years after the merger. In one group, managers who had joined post-merger became angry at this point, one arguing strongly that his colleagues were exaggerating such differences, agreeing with the picture from our data that the two banks had in reality been similar in the way they did things. He went on to give his own interpretation of the high scores for Ruthlessness, suggesting that he had felt quite negative after joining due to the entrenched positions he saw among his colleagues on what were in his opinion trivial issues. Others agreed, accusing their colleagues of being unable to let go of the past. One became quite agitated over the low scores for Enterprise (young, innovative, daring) from the new arrivals, berating his more established colleagues for being more concerned with sorting out “political differences” rather than helping to build the merged business.

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Case 2: Three Views Again in a Merged Company in Crisis Our second example has some similarities to the first. Two commercial services firms had merged in 2000, about two years before we were asked to assist management with what they saw as an unresolved cultural problem. Both companies manufactured and sold security systems. Each used a different technology and they often compared their products when selling by pointing out the advantages of their particular technology and attacking the technology of their rival. One of the companies was based in the USA (hereafter referred to as Firm A) and was very sales oriented. The other was based in Germany (hereafter referred to as Firm B) and was more systems oriented. Customers would have seen a very different experience when sold to by one or the other. The American company would have been more concerned to tailor things to the customer’s wishes but may have been guilty of over promising. The German company would have appeared less flexible but would have been more reliable in delivering what was promised. The setting for our study was the subsidiary operated in Britain. When the merger happened and the two units were combined, the company moved into the premises originally occupied by Firm B. Many staff had left the new company. As chance would have it the sales force became dominated by those who had worked previously for the American company and the support functions including finance by those who had worked for the German company. During the two-year post merger period, a succession of Managing Directors came and went. Other senior managers left, some to create new rivals in the market. Customers began to complain and business volumes and market share started to be affected. We were asked to assess the situation and as part of this work we surveyed all employees as to their views of the new company. Figure 2 and Table 3 contain the top line data from the study. We used a similar methodology as in the first case study. Table 3.

Agreeableness Enterprise Competence Chic Machismo Ruthlessness Informality Note: Data for Fig. 2.

Security Firm A

Security Firm B

New Joiners

2.66 2.64 2.83 2.43 2.83 3.13 2.52

2.84 2.64 2.78 2.36 2.90 3.08 2.82

3.15 2.96 3.14 2.59 3.08 2.98 2.99


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Fig. 2. The Merger of Two Security Companies. Note: Figures represent the average score for each dimension (1 Strongly Disagree to 5 Strongly Agree, with 3 Neutral).

Similar to the first case study of two banks (presented in Fig. 1), yet again three rather than two different views emerged but giving a quite different picture of the merged entity. This time the new arrivals, those who had joined since the merger, had a more positive view of the company compared with either group of employees who had worked for the merging organizations. The differences between the views held by new joiners and employees from either of the two backgrounds were significant on all 7 dimensions. Secondly, and unlike the case study of the Banks, the poorer views were those held by the employees of the acquiring American firm (Firm A). Again the differences were significant, in particular on Informality and Agreeableness. Those whose background had been in the German owned business (Firm B) felt the new organization was more Informal (laid back, casual) and more Agreeable (pleasant, supportive, honest). The people who had lived through the merger were the unhappier ones. The management turnover was higher among those with a background in the aquisitor firm, Firm A. Compared to the first case study of banks, the average scores of employees from the two merged companies were much lower and below 3 on all the dimensions except for Ruthlessness. The data provides evidence to explain why high turnover and low job satisfaction were continuing and getting worse two years after the merger. The combined business had become a rumor mill. No one believed the positive messages coming from top management about the future of the company. Most felt insecure, a view fueled by the regular departure of yet another senior manager. So, what should be done? Credible suggestions for improvement were

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to be provided not by the management (nor by ourselves) but by the employees themselves. With the support of management, we presented the survey data to a half-day workshop to which all employees were invited. We divided employees into groups and gave them an analysis of their own data, “warts and all.” We asked them to make specific proposals for improvement. The response was somewhat electric. People feel an affinity to the company they work for and although these employees were less than satisfied with the situation they found themselves in, they still held a stong emotional attachment to their company. We asked for a volunteer from each group to come to the front of the large hall and give their interpretations of what should be done to improve their own view of their company. There was no acrimony, no sense of wanting to take out their frustrations on the senior management team arraigned in the front row. Their ideas were often simple, common sense, but the difference was that they, the employees, were now galvanized into taking things into their own hands. Problems resulting from a merger are non-one’s fault. Mergers, particularly between previously directly competing companies, are never going to be easy. Yes you can expect managers to manage the predictable problems but how many of us can claim to be able to manage emotion, that feeling of loss that accompanies the disappearance of your previous identity? Taking the metaphor of counselling for bereavement, you can only go so far in helping people through a crisis as severe and personal as the loss of something you have been a part of and helped to nurture. Sooner or later they have to help themselves and that, fundamentally, is what we witnessed. Further it was very clear that we were dealing with emotion rather than just logic. Talking about issues that had been buried in the day-to-day was a necessary catharsis. There was a need to focus on the more obvious and tangible challenges of merging two operations. Management was already implementing many of the employees’ suggestions; the issue was that many employees did not want to know until they had the opportunity to have their say.

Case 3: An Early Look Can Help Our final example is of a merger that was about to happen. Following the collapse of a large firm of accountants (Hereafter referred to as Accounting Firm A), many partners and senior managers chose to join one of their larger competitors (Hereafter referred to as Accounting Firm B). The failed company had positioned itself in the market as highly professional and aggressive. It paid top dollar for the best employees, but its charge out rates were price competitive. The result


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Fig. 3. Two Firms of Accountants About to Merge. Note: Figures represent the average score for each dimension (1 Strongly Disagree to 5 Strongly Agree, with 3 Neutral).

included tremendous pressure on senior employees and perhaps a tendency to cut corners. The company they were joining was somewhat softer in character as the comparison of their data shows (see Fig. 3 and Table 4). Accounting Firm A is the firm that failed, Accounting Firm B the one many joined. Both views were those of managers working for the two organizations before the “merger.” The Ruthlessness (arrogant, controlling) scores from the managers in Firm A were the highest we had ever recorded. We also include a measure of satisfaction routinely in our questionnaire. Normally Ruthlessness correlates negatively with satisfaction; the higher respondents score a firm on this dimension the lower their satisfaction with it. This time there was no such correlation. Employees appeared Table 4.

Agreeableness Enterprise Competence Ruthlessness Chic Informality Machismo Note: Data for Fig. 3.

Accounting Firm A

Accounting Firm B

3.11 3.74 4.82 3.69 3.42 2.26 3.79

3.58 3.33 4.48 2.95 3.12 2.71 3.12

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indifferent to Ruthlessness; they accepted it. In Accounting Firm B that many were joining, Ruthlessness correlated negatively with satisfaction. The scores for Agreeableness (pleasant, supportive, honest) were higher there than for Firm A. Firm A was more macho (masculine, tough), a dimension that often scores high if Ruthlessness is high. They say that opposites attract, but was this marriage made in heaven? At the time of writing it was too early to say. This was not a formal merger in the sense of the other examples we have discussed. Technically a number of individuals went from one employer to another. Probably the partners in Firm B did not wish to acquire the liabilities and other baggage of the failed firm in a formal acquisition. After all clients of a firm of accountants will often follow the partner they deal with to a new house.

LESSONS LEARNT? A sample of three companies is hardly large enough to justify the drawing of any firm conclusions about mergers in general, but we are tempted to suggest the following. In the first two examples the idea that the merger of two businesses would create another with a reputation among employees that was somehow the average between the two previous reputations can be rejected. In the first case the perception of new arrivers, who are best placed to judge the merged business, was less positive than that of the two groups of managers who had worked for the merging firms. In the second the views of the new arrivers were more positive than those of the more established groups. In the second example and to an extent in the first, differences existed between the perceptions of those coming from different starting points both between those who had worked for the two merging entities in the past and those who had joined since. Each group is looking at the same thing, so why the differences? Clearly each is using a different point of reference. In our view the new arrivals will be best placed to judge reality, while those from the merged companies will inevitably see differences due to a comparison with what once was. This is what makes the data from the last case somewhat worrying for the merged entity. In each case respondents were surprised by our data. Some challenged its validity, or even its relevance, but many used it as a framework to argue and debate issues that had clearly not been aired previously. In the first two examples we found ourselves dealing with strong feelings and emotions. In the formal literature on mergers and particularly in that dealing with the financial aspects of


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merger, there is often little, and generally no, mention of emotion. Yet those who deal with the reality of merger recognize that some will feel they have no place in the new entity. They need to be counselled and helped to leave. Mergers create issues with great emotional content. The reputation perspective can offer a useful framework to assist companies in the way they think about the merger process. From our experience there is likely to be a post merger syndrome that no amount of rational argument will resolve. People have a need to talk things through and firms must recognize this and make the time and space available post merger to allow this to happen. In our second case, where senior managers had commissioned the study and were witness to the feedback, they too were surprised by what they heard. They argued, quite correctly, that they had already put into place solutions to many of the problems identified in the feedback session, but this is a rationalist perspective. What mattered here was perception of what they had done. Is a logical response ever going to be adequate to resolve an emotional issue, one as central to one’s being as your workplace, somewhere we spend a significant part of our lives? We would suggest that you cannot manage emotion with logic alone. The problems a merger creates will be a mixture of the rational and the emotional. The former can be addressed logically and will be addressed systematically by any competent management. Employees can be given rational reasons for wanting to make a merger succeed, better pay, more job security. But how do management transfer the emotional attachment that employees once felt towards their old company to the new entity? Some will argue that there is a simple answer, fit in or go! We believe that there is an equally simple rebuttal, fix it or the customer will go. The reputation literature contains a number of consistent themes. One is that how employees view the firm and how customers view the firm appear to be linked (Abratt, 1989; Davies & Miles, 1998; Gioia et al., 1996; Hatch & Schultz, 1997; Kennedy, 1977). We believe that this is more relevant in a service business where there is direct contact between the firm’s employees and the customer. It is unclear whether the internal view always leads the external view but, if one accepts the idea that staff are more likely to influence the customer than vice versa, it is logical to argue that the employees’ view should be more positive than that in the market. Customers too will have their preconceptions and images of the companies they deal with. It helps if the people they deal with have a positive view of the organization they work for. Figure 4 shows the difference in view for the employees of the firm in our second case reanalysed to show the discrepancy between those who had customer contact and those who did not. Clearly the customers’ impressions may have been damaged by the relatively negative views of those they met.

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Fig. 4. Data for our 2nd Case Reanalysed. Note: Figures represent the average score for each dimension (1 Strongly Disagree to 5 Strongly Agree, with 3 Neutral).

MANAGING REPUTATION One view of reputation management (van Riel & Balmer, 1997) claims that reputation is changed using three tools, communication (both internal and external), symbolism and behaviors. For example symbolism may include the promotion or demotion of a key person to emphasize what is considered to be compatible or not with the new approach. It may include a new logo designed to signify a break with the past. Communication may include advertising and Public Relations to indicate to external stakeholders what has changed internally. Internal communication may include an employee newsletter celebrating success relevant to the new approach. The most difficult thing to “manage” is likely to be the behaviors of employees. One option is to structure the annual appraisal system to include an assessment of the behaviors of staff to emphasize what is below expectation and what is to be supported. Training can also be used to promote certain behaviors. Our work would suggest an especial emphasis on listening to employees and measuring their perception of the relevant organizations pre and post merger. There is value in communicating these back to them so that they can take account of their own reality. Management must not assume that the identity of the merged entity will somehow become the average of the two merging identities. The merger process creates a driving force for identity change due to its own inherent symbolism. It is in our view impossible to predict what the new identity will be.


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If you subscribe to the view that internal identity influences external image then monitoring the change in internal perspective during the merger process is going to be important. Many mergers may fail to meet their financial expectations because of the emotional impact of the merger on customer facing employees and any spill over onto customers.

CONCLUSION Observers of the numbers of mergers that fail to meet their financial targets often point to “soft” issues to explain this disappointing reality. Some call for an audit of the culture of the organization being acquired. While we do not wish to critique such views we would suggest that this can only act as an early warning system of possible problems, for example in the third of our cases, managers would know that the two cultures were very different. However, having similar cultures, as was probably the case with our first example, is no guarantee of avoiding problems. A feeling of “them and us” still pervaded the merged entity six years later, even though new arrivals could not see much in the way of a rational reason for the perceived differences that managers from the merged banks perceived to persist. Table 5 compares the data form our three studies. Firms in the same sector can have quite different reputations. The reputation of the merged entity does not appear to have any obvious links to that of the merging entities, if the views of new arrivals can be considered to reflect that reality. We suggest that managers need to consider the emotional dimension of a merger as a priority. Emotions can be hidden but can undermine the best of (rational) plans. Customers can be expected to sense that there is something wrong if affected by the emotional contagion emanating from within the firm. We have used the perspective of reputation to argue that our views of firms are not always rationally based but that they can still be assessed objectively and managed systematically. Reputation as an academic subject is relatively new. It is derivative and interdisciplinary in nature but it is also beginning to establish new insights into old problems in its own right. The research agenda that has opened is both exciting and somewhat daunting, given how many aspects of organizational reality are connected directly or indirectly with reputation. Merger is a particularly fertile area for further research, given the emphasis on softer issues in the literature but the lack of a consensus of how soft and hard issues interact. Are companies ignoring one of the basics of management, that organizations are collections of people with both rational and emotional drivers? Merger can be a time of great emotion; managing this aspect could remove an obvious barrier to achieving the,

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Table 5. Three Studies Compared. Accounting Firms

Banks

Firm A

Firm B

Firm A

Firm B

New Joiners

Bank A

Bank B

New Joiners

3.11 3.74 4.82 3.42 3.79 3.69 2.26

3.58 3.33 4.48 3.12 3.12 2.95 2.71

2.66 2.64 2.83 2.43 2.83 3.13 2.52

2.84 2.64 2.78 2.36 2.90 3.08 2.82

3.15 2.96 3.14 2.59 3.08 2.98 2.99

3.39 2.47 4.15 3.01 3.23 3.23 2.31

3.47 2.74 4.02 3.07 3.31 3.17 2.44

3.27 2.25 4.13 3.22 3.79 2.25 3.33


Agreeableness Enterprise Competence Chic Machismo Ruthlessness Informality

Security Firms


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apparently elusive, financial gains that appear so clear from a rational analysis of the potential from putting two organizations together. Marriage is a metaphor often used in the management literature to explore the interaction between two organizations. It can also be used to explore a merger. Marriage is about two people becoming one but the trouble starts when they try to decide which is the dominant “one”! Our study suggests when there are coherent views among the three backgrounds (Background A, B, and new joiners) the better the integration and the higher their satisfaction level (for example, case study 1 vs. case study 2). The immediate concern for managers lies in the size and the nature of any gaps. From a manager’s view, you can integrate technological and system differences but differences of experience and of an emotional and psychological nature are harder to understand first of all and secondly to manage. This has to be done where possible in our view from the bottom up, by involving the people who have to create the new entity on the ground. Affinity to a new organization cannot be bought with cash alone, particularly when it is created out of two existing entities. Using a reputation perspective that emphasizes the impressions people hold of an organization, we have aimed to contribute to the wider debate on how you manage and research a merger.

REFERENCES Abratt, R. (1989). A new approach to the corporate image: Management process. Journal of Marketing Management, 5(1), 63–76. Astrachan, J. H. (1995). Organizational departures: The impact of separation anxiety as studied in a mergers and acquisitions. Journal of Applied Behavioral Science, 31(1), 31–50. Bekier, M., Bogardus, A. J., & Oldham, T. (2001). Why mergers fail. McKinsey Quarterly (4), 6–10. Black, M. (1962). Models and metaphors. New York: Cornell University Press. Buono, A. F., & Bowditch, J. L. (1989). The human side of mergers and acquisitions: Managing collisions between people, cultures, and organizations. San Francisco: Jossey-Bass. Cartwright, S., & Cooper, C. L. (1996). Managing mergers, acquisitions and strategic alliances: Integrating people and cultures. Oxford: Butterworth-Heinemann. Daniel, T. A., & Metcalf, G. S. (2001). The management of people in mergers and acquisitions. Westport, CT: Quorum Books. Davies, G., & Chun, R. (2002). Gaps between the internal and external perceptions of corporate brand. Corporate Reputation Review, 5(2/3), 144–158. Davies, G., Chun, R., daSilva, R., & Roper, S. (2003). Corporate reputation and competitiveness. London: Routledge. Davies, G., & Miles, L. (1998). Reputation management: Theory vs. practice. Corporate Reputation Review, 2(1), 16–27. Deephouse, D. L. (1997). The effect of financial and media reputation on performance. Corporate Reputation Review, 1(1/2), 68–72. Dutton, J. E., & Dukerich, J. M. (1991). Keeping in eye on the mirror: Image and identity in organizational adaptation. Academy of Management Journal, 34(3), 517–554.

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Fombrun, C. J. (1996). Reputation: Realizing value from the corporate image. Boston: Harvard Business School Press. Fombrun, C. J., & Shanley, M. (1990). What’s in a name? Reputation building and corporate strategy. Academy of Management Journal, 33(2), 233–258. Fryxell, G. F., & Wang, J. (1994). The Fortune corporate ‘reputation’ index: Reputation for what? Journal of Management, 20(1), 1–14. Gioia, D. A., & Thomas, J. B. (1996). Identity, image and issue interpretation: Sensemaking during strategic change in academia. Administrative Science Quarterly, 40, 370–403. Goldberg, M. E., & Hartwick, J. (1990). The effect of advertiser reputation and extremity of advertising claim on advertising effectiveness. Journal of Consumer Research, 17(September), 172–179. Hammond, S. A., & Slocum, J. W. J. (1996). The impact of prior firm financial performance on subsequent corporate reputation. Journal of Business Ethics, 15, 159–165. Hatch, M. J., & Schultz, M. (1997). Relations between organizational culture, identity and image. European Journal of Marketing, 31(5/6), 356–365. Kennedy, S. H. (1977). Nurturing corporate image: Total communication or ego trip. European Journal of Marketing, 31(1), 120–164. Marks, M. L., & Mirvis, P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. Academy of Management Executive, 15(2), 80–94. Morgan, G. (1986). Images of organization. London: Sage. Rao, H. (1997). The rise of investor relations departments in the Fortune 500 industrials. Corporate Reputation Review, 1(1/2), 172–183. van Riel, C. B. M., & Balmer, J. M. T. (1997). Corporate identity: The concept, its measurement and management. European Journal of Marketing, 31(5/6), 340–355. Srivastava, R. K., Mclnish, T. H., Wood, R. A., & Capraro, A. J. (1997). The value of corporate reputation: Evaluation from the equity markets. Corporate Reputation Review, 1(1/2), 62–68. Weiss, A. M., Anderson, E., & Maclnnis, D. J. (1999). Reputation management as a motivation for sales structure decisions. Journal of Marketing, 63, 74–89. Yoon, E. H., Guffey, J., & Kijewski, V. (1993). The effects of information and company reputation on intensions to buy a business service? Journal of Business Research, 27(3), 215–228.

DIMENSIONS OF MANAGEMENT STYLE COMPATIBILITY AND CROSS-BORDER ACQUISITION OUTCOME Richard Schoenberg ABSTRACT This paper examines how differences in management styles impact the performance of cross-border acquisitions. Two principal findings are reported. First, the study focuses on the individual dimensions of management style and highlights the particular influence that differences in risk orientation exert on acquisition outcome. This result, although unexpected, is argued to be consistent with prior literature that places risk orientation in a central role within organisational behaviour. Second, the relationship between management style compatibility and cross-border acquisition performance is found to be contingent upon the level of organisational interaction imposed by the post-acquisition process. Implications are drawn for both researchers and practitioners.

INTRODUCTION Recent years have seen a marked increase in cross-border acquisition activity as firms pursue growth via geographical diversification. Cross-border acquisitions Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 149–175 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03007-8

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have become the dominant means of internationalisation, accounting for approximately 60% of all foreign direct investment inflows (Hopkins, 1999). Yet, empirical studies draw attention to the mixed performance record of such acquisitions. While some researchers have reported that cross-border acquisitions create marginally positive abnormal returns for the shareholders of the acquiring firm (Seth et al., 2000), others have found negative shareholder wealth effects (Datta & Puia, 1995). This weak capital market performance is corroborated by more broadly based data which reveal that 45% of international acquisitions fail to meet their initial strategic objectives (Rostand, 1994). There has been growing recognition amongst practitioners of the importance of organisational issues as a key performance determinant of these acquisitions (Hopkins, 1999; Very & Schweiger, 2001). Many column inches have appeared in the financial press which argue that acquiring across borders can bring clashes of different management styles and operating approaches. This practitioner concern with management style compatibility is confirmed by survey data which reports that internal managerial issues are viewed as the primary cause of the higher perceived risk associated with cross-border acquisitions (Angwin & Savill, 1997). Against this background, the present study empirically investigates the impact of management style differences on the performance of cross-border acquisitions. It seeks to contribute to our understanding in three areas. First, while a limited number of studies have explored the issue of management style compatibility within samples of domestic acquisitions (Datta, 1991; Davies, 1968), this paper focuses its empirical investigation on the international context. Second, this research investigates the role of individual dimensions of management style difference. A firm’s management style has been seen to embrace a number of separate dimensions including the management team’s attitude towards risk taking, participation in decision-making, and the formality of organisational routines (Khandwalla, 1977). Yet prior empirical work has examined management style compatibility only at the aggregate level (Datta, 1991). We know little of how similarities or differences along the individual dimensions of management style affect acquisition outcome. In an attempt to fill that void, specific dimensions of management style difference are used as the primary independent variables in this study. Finally, this work also sets out to examine the extent to which the relationship between management style differences and acquisition performance is contingent upon the post-acquisition process adopted by the acquiring firm. Under which acquisition conditions is management style compatibility an important performance determinant, and under which can it be assigned a low relative

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importance? In addressing this question, the work aims to further integrate the study of organisational fit with the literature on acquisition process.

BACKGROUND AND HYPOTHESES Organisational Fit and Acquisition Performance A considerable number of studies have sought to understand how the organisational aspects of an acquisition influence the subsequent performance of the union. These “organisational fit” studies have diverse origins with contributions spanning the disciplines of strategic management (e.g. Chatterjee et al., 1992; Very et al., 1997), international business (e.g. Datta & Puia, 1995; Morosini et al., 1998) and organisational behaviour (e.g. Buono & Bowditch, 1989; Cartwright & Cooper, 1996). This literature stream has converged on the importance of cultural compatibility as a central component of organisational fit and acquisition outcome. Empirical studies of organisational cultural compatibility undertaken within samples of domestic acquisitions reveal that differences in the philosophies, values and behaviours of the top management teams can lead to uncertainty and insecurity amongst acquired firm managers (Buono & Bowditch, 1989) which may develop into feelings of anxiety, frustration and resentment (Cartwright & Cooper, 1996). These negative feelings in turn can result in miscommunication and conflict (Sales & Mirvis, 1984), reduced commitment towards cooperation (Weber et al., 1996) and lower job performance (Buono & Bowditch, 1989). This line of research is best summarised by Chatterjee et al.’s (1992) finding of a strong negative relationship between the extent of organisational cultural differences and acquirer shareholder gains. Cross-border acquisitions not only bring together two separate organisational cultures, they also involve the combination of the two national cultures of the firms concerned. Several studies have investigated the relationship between differences in national cultures and the outcome of international acquisitions. While some have found that inferior outcomes are associated with a large distance between the national cultures of the bidder and target (Datta & Puia, 1995), others have reported that national cultural distance exerts a positive impact on subsequent performance (Morosini et al., 1998). Others still have concluded that it is the perceived relative attractiveness of the bidder’s national culture that acts as a determinant of performance (Very et al., 1997). It is noteworthy that this latter group of researchers comment that “cross-national mergers are a complex phenomenon, sometimes influenced by national cultural differences, sometimes

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by organisational influences, sometimes by both, and sometimes by neither” (Very et al., 1993, p. 343).

Management Style Compatibility and Acquisition Performance Khandwalla (1977) asserts that an organisation’s management style comprises four dimensions, namely the management team’s attitude towards risk taking, participation in decision-making, administrative flexibility, and the formality of organisational routines. Management style has been posited as a central element of a firm’s overall culture, simultaneously reflecting the influence of both organisational culture (Sales & Mirvis, 1984; Sathe, 1985) and national culture (Hofstede, 1983). Given the complexity of cultural compatibility in acquisitions, some scholars have focused on the role of management style compatibility. In early case-study based work, Davies (1968) described how differences in management style between bidders and targets led to sub-optimal acquisition outcomes. Consistent with these early results, Datta (1991) found that a composite measure of management style differences exhibited a statistically-significant negative relationship to acquisition performance in a sample of 173 domestic U.S. acquisitions. Although empirical study to date has concentrated on domestic acquisitions, management style compatibility may be of even greater importance in international acquisitions which are subject to national as well as corporate influences. Scholars of international organisational behaviour assert that firms from a particular nation will exhibit management styles that are rooted within the nation’s particular institutional, legal and societal context (Hofstede, 1983; Olie, 1994). Indeed, empirical research has shown that management teams from different nations can vary significantly along the management style dimensions of risk orientation (Schneider, 1989); formality (Geletkanycz, 1997) and decision-making style (Tayeb, 1988). Thus the first three hypotheses of this study focus on how differences along these three dimensions of management style influence the performance of a cross-border acquisition. Two definitional issues warrant comment. First, consistent with the arguments of Sathe (1985) and Hofstede (1983), management style is seen to capture simultaneously the influence of both organisational and national cultures. This provides the research with particular managerial relevance. Practitioners evaluating a cross-border acquisition may have difficulty in separating organisational and national effects (Very et al., 1993), but will often form a perception of overall management style compatibility (Angwin & Savill, 1997). Second, an organisational (firm) level perspective of management style is taken, consistent with the overall


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research question: how do differences in the management styles of the acquiring and acquired organisations influence international acquisition performance? Differences in Risk Orientation and Acquisition Performance Pablo et al. (1996) argue that risk orientation is a key influence on the acquisition decision making process. Specifically, they argue that firms with different risk orientations will have different views on the most appropriate approach to postacquisition integration in any given situation. Put another way, where the bidder and target organisations possess different risk orientations they will form different perceptions of the integration approach actually selected for the acquisition. In itself these differences may detract from the creation of a harmonious organisational climate necessary for the smooth implementation of value creating capabilities (Haspeslagh & Jemison, 1991; Hunt, 1990). More acutely, these differences in perception may to lead to different behaviours towards the same set of events (Rentch, 1990) and so give rise to conflicting actions and other dysfunctional organisational outcomes, ultimately resulting in inferior acquisition performance. Indeed, elements of the prior research on acquisition “organisational fit” support the notion that the risk orientations of the two combining firms can have a bearing on acquisition performance. Davies’s (1967) early work on domestic U.S. acquisitions concluded that differences in risk philosophy “affect all decision-making levels and functions within the organisation” (Davies, 1967, p. 87). Further tangential support is available from more recent empirical studies which have sought to understand the influence of national culture on acquisition integration. Morosini and Singh (1994) report that the relative Uncertainty Avoidance scores of bidders and targets home nations were related to the performance of different acquisition integration strategies, a finding of particular relevance to the arguments of Pablo et al. (1996) given the association between Uncertainty Avoidance and an organisation’s risk orientation (Harzing & Hofstede, 1996; Hofstede, 1983). Together, these arguments lead to the hypothesis that: H1. Differences between the acquiring organisation and the acquired organisation in their attitudes towards risk are negatively correlated to the performance of the cross-border acquisition. Differences in Formality and Acquisition Performance Kitching’s (1967) path-breaking research established that the nature of reporting relationships and control systems between acquiring and acquired companies

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could be an important influence on acquisition outcome. Subsequent case-study based literature documents several examples of the conflicts that differences in the formality of such organisational routines can cause. Walter (1985) recounts how target company managers can feel alienated and marginalised when explicit succession plans are introduced and previously “cosy” reporting relationships and informal coalitions are threatened by the shift towards formal control and communication systems. Cartwright and Cooper (1996) highlight the anxiety and stress acquired firm personnel frequently experience post-acquisition as they anticipate more performance orientated control and reward systems. Within cross-border acquisitions the scope for such differences in formality may be heightened as different national propensities for rule-making (Hofstede, 1983) will influence organisations’ preferred operating styles in terms of formality and adherence to the status quo (Geletkanycz, 1997). Indeed, acquirers from different nations have been shown to favour different degrees of formality within their cross-border acquisitions with consequent performance impacts (Calori et al., 1994). Thus it is hypothesised that, H2. Differences between the acquiring organisation and the acquired organisation in the formality of organisational routines are negatively correlated to the performance of the cross-border acquisition.

Differences in Decision-making Style and Acquisition Performance Similarly, firms from particular nations exhibit different decision-making styles (Tayeb, 1988) and these preferences of style extend to acquisitions where the opportunity to adopt a preferred style is associated with superior performance (Child et al., 1999). For example, French acquirers have been found to centralise strategic decision-making to a significantly greater extent than their British counterparts (Lubatkin et al., 1998). Differences in the decision-making styles favoured by the combining firms in a cross-national acquisition may therefore hinder post-acquisition integration efforts due to the potential for conflict and frustration on both sides. Support for this position is available from empirical work which suggests that acquisitions can under-perform where employees of the acquired company perceive that their decision-making autonomy will be restricted following acquisition (Calori et al., 1994; Cartwright & Cooper, 1996). Therefore it is hypothesised that: H3. Differences between the acquiring organisation and the acquired organisation in the extent of participation in decision-making are negatively correlated to the performance of the cross-border acquisition.


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Influence of the Post-acquisition Process The second set of hypotheses concern how the relationship between management style differences and cross-border acquisition performance is contingent upon the post-acquisition process adopted by the acquiring firm. Two elements central to the implementation process are examined: the form of post-acquisition integration and the extent of executive departure within the acquired firm.

Influence of the Form of Acquisition Integration The extent to which the management styles of the acquirer and acquired come into contact following an acquisition is governed to a large degree by the form of post-acquisition integration adopted by the acquiring firm. Haspeslagh and Jemison (1991) identify three common forms of acquisition integration, “Preservation,” where the acquired organisation is granted a high degree of autonomy, typically being positioned within the acquiring organisation as stand-alone subsidiary. “Symbiosis,” where the acquiring company attempts to achieve a balance between preserving the organisational autonomy of the acquired company while transferring strategic capability between the two organisations. “Absorption,” where the aim is to achieve full consolidation of the operations, organisation and culture of both organisations, ultimately dissolving all boundaries between the acquired and acquiring firms. Preservation integration involves high levels of organisational autonomy and little, if any, contact between operating managements (Haspeslagh & Jemison, 1991). In these circumstances, the acquired firm should be relatively unaffected by the acquirer’s organisational climate (Chatterjee et al., 1992; Datta & Grant, 1990), suggesting that differences in management style may have little adverse impact on the outcome of the union. Conversely, differences in management styles are likely to assume a higher level of importance in absorption integration, where the degree of strategic interdependence is high and close collaboration between the two sets of managers, and the adoption of common policies and procedures, is necessary to achieve the desired transfer of skills or sharing of activities (Cartwright & Cooper, 1996; Haspeslagh & Jemison, 1991). Absorption integration therefore involves a substantial loss of autonomy for the acquired organisation (Haspeslagh & Jemison, 1991), and depending on the power structure of the two parties (Sales & Mirvis, 1984), the acquired firm typically relinquishes its own management style

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in favour of that of the acquiring company (Datta & Grant, 1990). Differences in management styles under such circumstances may cause significant internal conflict and a deterioration in business performance (Buono & Bowditch, 1989). These arguments are summarised in the hypotheses that: H4a. In cross-border acquisitions characterised by absorption integration, the extent to which management style differences exist between the acquiring organisation and the acquired organisation will be negatively correlated to the performance of the acquisition. H4b. In cross-border acquisitions characterised by preservation integration, the extent to which management style differences exist between the acquiring organisation and the acquired organisation will not be correlated to the performance of the acquisition.

Influence of the Extent of Executive Departure A second aspect of the acquisition process that may influence the relationship between management style differences and acquisition performance is the extent of executive departure from the acquired company. High rates of management turnover following cross-border acquisitions are a common occurrence, with, on average, 20% of the previous top management team departing within the first year following acquisition (Krug & Nigh, 2001). Extensive executive departure may dilute the strength of any management style differences that initially exist between the combining companies. Management turnover following an acquisition has been recognised as an important mechanism for implementing culture change (Buono & Bowditch, 1989), as a means of removing incumbents who deviate from desired organisational norms (Sathe, 1985), and as a means to supplant existing power and control structures (Cannella & Hambrick, 1993). Equally, voluntary departure of acquired firm executives may indicate unhappiness with the acquiring firm’s management style (Krug & Nigh, 2001; Larsson & Finkelstein, 1999). The imposition of the acquirers’ own management style on a newly acquired target can cause feelings of stress and a loss of identity amongst target employees (Buono & Bowditch, 1989), which in turn can lead to higher rates of departure (Krug & Hegarty, 2001). Senior executives are most often the first to depart following an acquisition (Krug & Hegarty, 2001) and it is this group of employees that plays the key role in shaping an organisation’s attitudes, behaviours and beliefs (Very et al., 1993). These arguments suggest that high rates of executive departure may reduce both the absolute strength of the target company’s previous management style and


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the commitment of remaining employees to it. This dilution may in turn reduce the potential for conflicts over management style differences, leading to the hypotheses: H5a. In cross-border acquisitions where there are low levels of executive departure from the acquired company following the acquisition, the extent to which management style differences exist between the acquiring organisation and the acquired organisation will be negatively correlated to the performance of the acquisition. H5b. In cross-border acquisitions where there are high levels of executive departure from the acquired company following the acquisition, the extent to which management style differences exist between the acquiring organisation and the acquired organisation will not be correlated to the performance of the acquisition.

METHODOLOGY Sample The study’s sample consisted of cross-border acquisitions made in the European Union by British firms, with data collected via postal questionnaire. An initial listing of 517 such cross-border acquisitions was compiled from the database of Acquisitions Monthly magazine. Acquisitions of minority holdings were excluded (defined as less than 50.01%), as were those acquisitions which had been made through an overseas subsidiary and were not therefore strictly cross-border. In addition to control for the effects of strategic fit the listing was restricted to related acquisitions, by checking that the businesses of the merging firms were in the same two-digit Standard Industrial Classification (following Chatterjee et al., 1992; Krishnan et al., 1997). Several acquiring companies were responsible for more than one acquisition within this listing, with 302 firms accounting for the 517 acquisitions. In order to avoid several questionnaires being sent to the executives of multiple acquirers, the single largest acquisition in terms of bid value for each acquirer was selected for inclusion in the survey sample.1 Potential respondents were current executive directors of the acquiring firms who were also serving as directors at the time of the acquisition. The names and corporate addresses of the current acquiring firm directors were identified using the FAME corporate database and were then compared with those listed in corporate directories for the year of the acquisition. This ensured that

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questionnaires were mailed only to directors familiar with the complete history of the acquisition. The above procedure brought the total number of acquisitions in the starting sample to 239, with a total of 861 questionnaires sent out to an average of four acquiring firm directors per acquisition. In each case questionnaires were mailed between 3 and 5 years following the completion of the acquisition to provide adequate time for the post-acquisition implementation period. The mail-out procedure was adapted from Dillman (1978), with an initial follow-up letter being sent after one week and a second follow-up with replacement questionnaire materials after one month. Usable responses were obtained from 129 of the acquisitions, representing a response rate of 54%.2 Single replies were obtained from 73 firms, while 56 firms provided responses from more than one executive. Inter-rater reliability tests were performed on the 56 acquisitions for which multiple responses had been received, following Calori et al. (1994) and Weber et al. (1996). In the 34 cases where there were two respondents per acquisition a Spearman rank correlation was calculated to assess the level of agreement between the individual respondents along the questionnaire items making up the management style difference and acquisition performance variables. The average correlation between respondents was 0.79. In the 22 cases where there were three or more respondents per acquisition Kendall’s Coefficient of Concordance was calculated, with an average coefficient between respondents of 0.92. The results indicate high levels of inter-rater reliability and provide evidence towards the organisational validity of the survey responses. The final sample of 129 cross-border acquisitions was thus made up of the 56 acquisitions represented by the aggregate of their multiple responses together with the 73 acquisitions represented by a single response. These 129 acquisitions comprised cross-border purchases by British companies in a total of 9 European nations and covered a relatively broad spread of industries, with manufacturing and service sectors making up 63 and 37% of the sample respectively. Potential non-response bias within the sample was investigated by comparing respondents and non-respondents directly along the dimensions of relative acquisition size, country of acquisition and industry sector. Statistical tests indicated no evidence of non-response bias along these dimensions.

Independent Variables Management Style Differences The present study uses an adapted version of Datta’s (1991) questionnaire instrument to measure differences in management styles between two companies,


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which itself is based on Khandwalla’s (1977) comprehensive review of the management style literature. Respondents were asked to indicate their perceptions of the difference between the management styles of the acquiring and acquired companies at the time of acquisition using a 17 item Likert-type scale (see Appendix for items). Responses to the 17 items were factor analysed in order to ascertain the dimensions of management style difference present. Varimax rotation was employed to aid interpretation of the components. Six factors were extracted with eigenvalues greater than 0.9, which collectively explained 71% of the variance in the data. The six dimensions were readily labelled by the items loading most strongly onto each,3 FORMALITY (“FORM”): differences in the extent to which organisational routines (e.g. procedures, job descriptions, communication) are formally structured. RISK (“RISK”): differences in long-term orientation and the associated attitude towards risk. SYSTEMS (“SYST”): differences in the emphasis placed on the use of sophisticated systems for decision-making and control (e.g. emphasis on sophisticated IT systems for control, and analytical techniques for decision-making). PARTICIPATION (“PART”): differences in the extent of participation in strategic and operational decision-making. SELF-RELIANCE (“REL”): differences in the extent to which management displays self-reliance, characterised as a proactive approach to problems with decisions based on personal experience and judgement rather than on expert opinions. FUNDING (“FUND”): differences in the degree of emphasis placed on external borrowings and stock issues to finance growth. The item with the highest factor loading was used as a surrogate to represent each factor in subsequent analyses, following Hair et al. (1995). It is noteworthy that the data gathered by the questionnaire represent the acquirers’ perceptions as to the management styles that existed in the two companies at the time of acquisition. The use of perceptions is frequently adopted in research on acquisition processes (e.g. Chatterjee et al., 1992; Krug & Hegarty, 2001; Weber et al., 1996) and there is evidence that perceptions formed during the pre-bid phase can be the best predictors of post-acquisition behaviour (Krug & Hegarty, 2001). In the present case, it is rare for acquiring managements to have detailed objective knowledge on the management style of a target firm (Buono & Bowditch, 1989) and, in practice, acquirers are likely to base their integration behaviours on perceived differences in organisational characteristics, including management styles, built up during the pre-bid and negotiation stages (Haspeslagh

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& Jemison, 1991). A focus on perceived differences may therefore have particular relevance to acquisition decision-making and outcomes from the acquirer’s perspective.

Form of Integration The post-acquisition integration process was operationalised using Haspeslagh and Jemison’s (1991) typology. The degree of strategic interdependence established between the acquiring and acquired firms was measured by asking respondents to indicate the extent to which knowledge had been transferred or resources shared for seven functional and three general management areas since the acquisition was completed. Principal component analyses of the responses revealed the presence of five components: “operational knowledge transfer,” “marketing knowledge transfer,” “administrative knowledge transfer,” “functional resource sharing,” and “administrative resource sharing.” The degree of organisational autonomy granted to the acquired company in the post-acquisition period was measured using an instrument adapted from that previously utilised by Datta and Grant (1990). Respondents were asked to indicate the locus of decision making (acquired firm; consensus; acquiring firm) for 18 separate operational and strategic decisions affecting the acquired firm. All of the eighteen decision items loaded strongly (>0.6) onto a single component. The individual component scores for the five strategic interdependence components and the single autonomy component were then used as input to an SPSS “Quick Cluster” procedure. A three cluster solution corresponded to Haspeslagh and Jemison’s integration processes. Cluster 1 was consistent with Symbiosis Integration (high levels of both resource sharing and knowledge transfer; high level of autonomy), cluster 2 with Preservation Integration (low levels of resource sharing and knowledge transfer; high level of autonomy), and cluster 3 with Absorption Integration (low level of autonomy; high levels of resource sharing and knowledge transfer). The cluster membership of each acquisition was used to represent the form of integration in subsequent analyses.

Executive Departure The turnover of the acquired company management was measured using an item adapted from Shanley (1994). Respondents were asked to indicate the extent to which the prior top management team changed one year after the


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acquisition on a scale of one (little or no change) to five (complete turnover). In order to accommodate the subsequent hypothesis testing, the responses to this questionnaire item were input into a quick cluster procedure in order to categorise the sample into those acquisitions which had experienced high levels of executive departure and those that displayed low levels of executive departure.

Dependent Variable: Acquisition Performance Acquisition performance was measured using the acquiring management’s assessment of the extent to which the original performance expectations for the acquisition had been met. The instrument comprised nine financial performance criteria synthesised from theoretical and empirical studies of acquisition objectives (Trautwein, 1990; Walter & Barney, 1990. See Appendix for items). For each criterion, respondents were asked to indicate using five point Likert-type scales, first, the importance assigned to the particular performance criterion at the time of acquisition and second, the performance of the acquisition relative to their initial expectations. This procedure allowed a “weighted performance” score for each criterion to be obtained by multiplying the performance score by the importance attributed to that particular measure by the acquirer. The scale exhibited Cronbach’s Alpha = 0.88 and factor analysis confirmed its uni-dimensionality. The data thus allowed a single weighted mean performance score to be established for each acquisition. A subjective performance measure was adopted in this study in view of the established difficulties in obtaining “objective” measures (Larsson & Finkelstein, 1999; Very et al., 1997). For example, stockmarket measures of acquisition performance based on abnormal returns methodology necessitate limiting the sample to acquisitions made by publicly quoted firms and, further, give information only on expected ex-ante acquisition performance rather than that actually achieved ex-post (Larsson & Finkelstein, 1999). Similarly, comparable accounting measures of performance for individual cross-border acquisitions are typically not available, due to national differences in accounting standards and difficulties in disaggregating the performance of individual operating units from consolidated accounts (Larsson & Finkelstein, 1999). More positively, empirical support for the validity of subjective performance measures is available from a number of separate methodological studies. Dess and Robinson’s (1984) widely cited investigation into the relationship between objective and subjective performance measures concluded that “the Top Management Team’s perception of how well their firm had performed – measured

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in a subjective and relative sense – was consistent with how the firm actually performed” (Dess & Robinson, 1984, p. 271). Similarly, others have found that manager’s subjective performance assessments correlate strongly with objective measures within samples that range from new ventures (Brush & Vanderwerf, 1992) to international joint ventures (Glaister & Buckley, 1998).

Control Variables Three control variables were included. Prior research has shown that both relative organisational size and the prior profitability of the acquired firm may affect cross-border acquisition performance directly (Bleeke et al., 1993). Relative size was operationalised as the ratio of the sales turnover of the acquired firm to that of the acquiring firm at the time of the acquisition (following Krishnan et al., 1997). The prior profitability of the acquired firm was measured by asking respondents to indicate their perception of the acquired company’s return on capital employed relative to the its major competitors at the time of the acquisition, using a scale of 1 (very poor) to 5 (very good). Haspeslagh and Jemison (1991) argue that the nature of the bid negotiations influences the climate that surrounds a takeover within both companies and raises organisational expectations of what post-acquisition life will hold. The nature of negotiations therefore may influence the perception and strength of reaction towards any differences in management style that manifest themselves, warranting its inclusion as a control variable. Hunt’s (1990) typology of the nature of negotiations was adopted, with each acquisition classified as either “wholly-friendly” (coded 0; willing seller and no other bidders), or “partly-contested” (coded 1; unwilling seller or other bidders involved). None of the acquisitions in the sample was “wholly-hostile” (unwilling seller and other bidders involved).

Method of Analysis The study’s hypotheses were tested using multiple linear regression. The analysis was run using the complete sample of 129 acquisitions in order to investigate Hypotheses 1, 2, and 3, which related to the influence of differences along specific dimensions of management style. Hypotheses 4 and 5 were “relational” in nature and, following the arguments of Haleblian and Finkelstein (1993), called for the regression equation to be computed separately for sub-groups of acquisitions subject to absorption vs. preservation integration (Hypothesis 4) and high vs. low levels of executive departure (Hypothesis 5). In each of the latter cases,


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the hypotheses were formally tested by the use of a t-test to ascertain whether there were statistically significant differences between the regression coefficients obtained for each sub-sample.

RESULTS AND DISCUSSION Table 1 gives the means, standard deviations and intercorrelations for the study variables, while Table 2 presents the regression results for the complete sample of 129 cross-border acquisitions. Interestingly, out of the six components of management style difference, only the size of differences in risk orientation showed a statistically significant bivariate relationship with acquisition performance (r = −0.31; p < 0.001).4 The regression results confirmed the bivariate correlations. The statistical strength of the relationship between differences in risk and performance is noteworthy (p < 0.001), as is the fact that the sign of the relationship is in the expected direction: the greater the differences in risk the worse the performance of the acquisition (B = −0.37). The size of the difference along the other five factors of management style showed no statistically significant influence on performance (B = −0.08–0.06; p = 0.43–0.64). Hypothesis 1 relating to the influence of differences in risk orientation was thus supported, while Hypotheses 2 and 3 relating to differences in formality and participation respectively were not supported. The finding that it is only differences in the attitude towards risk that appear to have an impact on acquisition performance was unexpected. Certainly, the wide importance of risk orientation is acknowledged in the organisational behaviour literature. It may be therefore that differences in risk orientation is the one component of management style that most fully captures the complex set of organisational differences that can be present within a cross-border acquisition. The risk-taking component of a management’s style has been linked to a firm’s ability to accommodate different organisational structures (Covin & Slevin, 1988), its openness to organisational change (Harzing & Hofstede, 1996), its favoured control and reward systems (March & Shapira, 1987) as well as being seen as an important component of corporate culture (Sathe, 1985) and national culture (Hofstede, 1983). Indeed, Sitkin and Pablo’s (1992) review of the determinants of risk behaviour highlights the complex array of organisational variables that influence risk orientation and lends support to the notion that differences in risk within an acquisition context may reflect a wide range of underlying organisational differences. Previous acquisitions research has illustrated how these underlying organisational differences can hinder an atmosphere conducive to capability transfer (Haspeslagh

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Table 1. Descriptive Statistics and Correlations of Study Variables. Variable

Mean

S.D.

1. Acquisition performance 2. Differences in formality 3. Differences in funding 4. Differences in participation 5. Differences in risk 6. Differences in self-reliance 7. Differences in systems 8. Nature of negotiations 9. Prior profitability 10. Relative size

2.98 0.96 1.33 1.00 1.44 1.25 1.21 1.03 0.91 0.96 1.18 0.98 1.42 1.12 0/1 variable 3.01 1.04 0.14 0.22

1

2 −0.13

4

5

6

0.02 0.01 −0.31*** 0.00 0.22** 0.32*** −0.06 0.39*** 0.14 0.14 −0.07 0.30*** 0.19* 0.00

7

8

9

0.03 0.15 0.30** 0.42*** −0.07 0.04 0.27* −0.19* 0.05 0.32*** 0.02 0.12 0.13 −0.04 −0.06 0.22* 0.02 0.05 −0.00 0.04 −0.16

10 0.13 −0.03 0.00 −0.03 0.06 −0.03 −0.11 0.09 0.05

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Note: All data relate to two-tailed Pearson correlation coefficients. ∗ p < 0.05. ∗∗ p < 0.01. ∗∗∗ p < 0.001.

3


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Table 2. Regression Results for Complete Sample of 129 Cross-border Acquisitions. Regression Coefficient Independent variables Differences in formality Differences in funding Differences in participation Differences in risk Differences in self-reliance Differences in systems Nature of negotiations Prior profitability Relative size Constant The model Dependent variable No. of cases F-statistic R2 Adjusted R2

−0.08 (−0.80) 0.03 (0.48) 0.05 (0.66) −0.37*** (−4.27) 0.05 (0.65) 0.06 (0.79) 0.35* (2.19) 0.27*** (3.61) 0.55 (1.55) 2.08*** (6.75) Acquisition performance 129 4.93*** 0.28 0.22

Note: Regression coefficients shown with t-statistics in parentheses. ∗ p < 0.05. ∗∗∗ p < 0.001.

& Jemison, 1991) and so reduce expected acquisition outcomes (Chatterjee et al., 1992; Datta & Puia, 1995; Hunt, 1990). These arguments are consistent with Pablo et al.’s (1996) thesis that risk orientation plays a central role within acquisitions. Attention next turns to whether the use of alternative post-acquisition processes alters the relationship between risk differences and acquisition performance. Table 3 presents the regression results obtained for the sub-samples subject to preservation and absorption integration. The results reveal that alternative post-acquisition processes do modify the relationship between differences in risk orientation and acquisition outcome, but in the opposite direction to that hypothesised in Hypotheses 4a and 4b. Differences in the attitude towards risk were seen to lead to inferior performance in those acquisitions subject to preservation integration, while in absorption acquisitions the presence of such differences exerted no statistically significant influence on subsequent performance. One possible explanation for these counter-intuitive results is that they reflect the measurement time-scale employed within this study. Managers reported their views of acquisition performance 3–5 years after the purchase was

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Table 3. Regression Results for Sub-groups Subject to Absorption vs. Preservation Integration. Acquisitions Characterised By Absorption Integration

Preservation Integration

Independent variables Differences in formality Differences in funding Differences in participation Differences in risk Differences in self-reliance Differences in systems Nature of negotiations Prior profitability Relative size Constant

0.28 (0.99) −0.03 (−0.24) −0.06 (−0.36) −0.33 (−1.73) −0.16 (−0.87) −0.17 (−0.99) 1.79** (4.36) −0.05 (−0.23) 1.01 (1.50) 2.64* (2.94)

−0.19 (−0.86) −0.00 (−0.02) 0.21 (1.26) −0.87*** (−4.76)a 0.18 (0.98) 0.16 (0.87) 0.17 (0.59) 0.40** (2.98) 2.29 (1.99) 1.57** (2.78)

The model Dependent variable No. of cases F-statistic R2 Adjusted R2

Acq. Perform. 19 3.82* 0.79 0.58

Acq. Perform. 44 3.72** 0.50 0.36

Note: Regression coefficients shown with t-statistics in parentheses. a t-Test for risk difference coefficients (absorption vs. preservation integration): t = 2.07, p < 0.05. ∗ p < 0.05. ∗∗ p < 0.01. ∗∗∗ p < 0.001.

completed. Absorption integration involves the acquired firm in high levels of strategic interdependence with the relinquishment of its organisational autonomy (Haspeslagh & Jemison, 1991). Case study researchers have observed that this absorption process frequently involves the imposition of the acquirer’s culture and management style on the acquired firm (Buono & Bowditch, 1989; Haspeslagh & Jemison, 1991). This “convergence of styles” has been associated with substantial conflict and a dysfunctional impact on performance (Buono & Bowditch, 1989; Cartwright & Cooper, 1996). However, the majority of prior researchers have concentrated their attention only on the first one to three years following acquisition. Other acculturation literature suggests that once this convergence of styles has been achieved, an equilibrium state is reached where the original organisational dynamics reduce in importance and performance improves (Sales & Mirvis, 1984; Walter, 1985).


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These scholars report that the time taken to reach equilibrium is typically between three to five years, coincident with the time-scale adopted for performance measurement in this study. It is therefore postulated that perceived differences in the management styles initially present may have disappeared by the time performance was measured in this study, as the requirements of absorption integration forced a convergence of the two initial styles towards an equilibrium. Thus, we observe that subsequent acquisition performance is independent of initial management style differences in absorption integration. In contrast, preservation integration does not call for strategic interdependence between the two firms and the organisational autonomy of the acquired firm is preserved post-acquisition (Haspeslagh & Jemison, 1991). Because there is no operational need for the acquirer to impose their management style, the target firm’s previous management style continues intact under preservation integration (Haspeslagh & Jemison, 1991). It is postulated that under these circumstances there is no convergence of styles and no equilibrium state is reached (at least in the medium term). Rather, the original management style of the target company is literally “preserved” into the life of the acquisition. Although any differences in management style may not be exposed during the day to day running of operations, they can continue to become exposed during the strategy setting and financial reporting process imposed by the acquirer (Buono & Bowditch, 1989; Walter, 1985). Therefore differences in management styles under preservation integration may exert an enduring influence on subsequent acquisition performance, as was observed. The findings with regard to the form of integration were broadly supported by those concerning the impact of executive departure from the acquired company (see Table 4). Differences in risk orientation exhibited a negative impact on performance where the acquired firm executives were retained following the acquisition, but no statistically significant impact when there were high levels of executive departure. Hypotheses 5a and 5b were therefore upheld, albeit at only the weaker 10% significance level. High rates of executive departure from a newly acquired firm have been linked with both a dilution of the firm’s previous management style (Buono & Bowditch, 1989) and a means to actively supplant the previous style in favour of the acquirer’s own (Cannella & Hambrick, 1993; Sathe, 1985). Subsequent acquisition performance was therefore expected to be independent of initial management style differences for acquisitions with high levels of executive turnover, as the previous management style of the acquired firm may have been diluted to the point where an equilibrium state had been reached. Where there is little or no executive departure within the acquired firm there is no such dilution and

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Table 4. Regression Results for Sub-Groups Subject to Low vs. High Levels of Executive Departure. Acquisitions Characterised By

Independent variables Differences in formality Differences in funding Differences in participation Differences in risk Differences in self-reliance Differences in systems Nature of negotiations Prior profitability Relative size Constant The model Dependent variable No. of cases F-statistic R2 Adjusted R2

Low Executive Departure

High Executive Departure

−0.13 (−1.12) −0.01 (−0.11) 0.17 (1.47) −0.37** (−3.00) −0.06 (−0.59) 0.10 (1.00) 0.02 (0.08) 0.30** (2.96) 0.18 (0.45) 2.34*** (5.96)

−0.04 (−0.23) 0.04 (0.30) −0.02 (−0.16) −0.11 (−0.78)a 0.23 (1.65) 0.01 (0.11) 0.94** (3.38) 0.20 (1.44) 0.64 (0.94) 1.52* (2.68)

Acq. Perform. 68 3.31** 0.34 0.24

Acq. Perform. 53 2.19* 0.31 0.17

Note: Regression coefficients shown with t-statistics in parentheses. a t-Test for risk difference coefficients (low vs. high executive departure): t = 1.41, p < 0.1. ∗ p < 0.05. ∗∗ p < 0.01. ∗∗∗ p < 0.001.

any management style differences initially present are “preserved” through the post-acquisition period, with the negative consequences on performance already outlined. One of the aims of this research was to investigate the extent to which the relationship between management style compatibility and cross-border acquisition performance was contingent upon the acquisition process adopted by the acquiring firm. Together, the results from the testing of Hypotheses 4 and 5 suggest that management style compatibility only exerts an influence on performance when the acquisition process acts to preserve any differences in management style over the long term. This was observed with both the major process elements investigated here. Where the post-acquisition process provided the opportunity for the two management styles to converge, as in the case of absorption integration or high levels of executive departure from the acquired firm, initial management style differences did not display a relationship with subsequent performance.


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However, where any initial style differences potentially were preserved, either by the use of preservation integration or through the continuation of the target company’s previous management team, initial differences in management styles did act as a determinant of subsequent acquisition performance.

CONCLUSIONS AND IMPLICATIONS This research has extended our knowledge of how differences in management styles impact the performance of cross-border acquisitions and makes two primary contributions. First, the study has focused on the individual dimensions of management style and has highlighted the particular influence of differences in risk orientation. This result, although unexpected, has been argued to be consistent with prior literature that places risk orientation in a central role within organisational behaviour. Second, the findings add to our understanding of how organisational fit and acquisition process work together to affect the outcome of international acquisitions. The results suggest that the post-acquisition process appears to moderate organisational differences only if the process adopted promotes convergence of the differences. Put the other way round, where the acquisition process acts to preserve the original organisational characteristics of the bidder and target post-acquisition, organisational differences can continue to cause conflict within the ongoing parent-subsidiary relationship and so exert a negative influence on performance. This conclusion may be intuitive, but it is somewhat counter to the conventional prescription that organisational fit can be assigned a relatively low level of importance where the organisational characteristics of the target company are to be preserved following the acquisition. Rather, it appears that it is under just these circumstances that organisational fit can have a sustained long term influence on acquisition performance. These findings have important implications for practitioners. Increasingly, both acquisitions scholars and the popular financial press have advocated the use of “organisational due diligence” as part of the pre-bid planning process (e.g. Angwin, 2001; Haspeslagh & Jemison, 1991). The selective influence that differences in risk orientation appear to exert on cross-border acquisition performance suggests that any pre-bid assessment of management style compatibility should focus in particular on this dimension. Where differences between the target and bidder are identified, and the acquirer intends not to assimilate the two organisations post-acquisition, the results indicate that the subsequent financial performance of the acquisition will be lower than would otherwise have been the case.

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The results also challenge the approach commonly adopted by practitioners of establishing the newly acquired firm as an autonomous subsidiary in an attempt to minimise the impact of recognised organisational differences (Weber et al., 1996). The data revealed that differences in risk orientation negatively influenced performance even when the acquired firm was managed as an autonomous subsidiary (preservation integration) or there were minimal changes to the target company management team. Future cross-border acquirers should recognise that organisational isolation is not a viable strategy for avoiding the negative consequences of management style incompatibility. This again emphasises the need for full organisational due diligence even when low levels of operational interaction between bidder and target are planned. As with any research, potential limitations can be identified. In particular, this study has relied on subjective measures for both of its central variables: acquisition performance and management style differences. Justifications of this approach have been provided in the methodology section.5 A further feature of the management style measure was that it relied on retrospective reports. The recall period adopted here of up to 5 years, while long, should not be considered excessive (Miller et al., 1997). First, the respondents were director-level managers, who are credited with high intellectual capabilities and thus a better ability to recall events than most (Huber & Power, 1985). Second, acquisitions are major organisational events, demanding considerable time, energy, and career risk for the bidding company executives (Very & Schweiger, 2001). Organisational events important to the managers concerned are not only reported more accurately and completely (Huber & Power, 1985), but perceptions of organisational behaviours in relation to such events have been found to remain accurate for considerable periods (Pettigrew, 1979). The combination of these two points, together with the high levels of inter-rater reliabilities, provides confidence towards the retrospective reports in the present case. Further research is called for to confirm the generalisability of this study. For example, does the particular importance of risk orientation hold within samples of domestic acquisitions and with cross-border acquisitions of alternative geographic make-up to those tested here? Future studies could usefully focus on the direction of any differences in addition to magnitude effects. For example, do differences in risk orientation have equal impact regardless of whether it is the bidder or the target that is the most risk adverse? Qualitative longitudinal research is also indicated to investigate in more depth the mechanisms by which management style compatibility and acquisition process interact. Such studies would not only further our understanding of how management style differences impact performance, but would also allow more detailed prescriptions for practitioners faced with such issues.


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NOTES 1. There was a risk that this procedure may have introduced bias into the sample. This was checked by comparing the relative size distribution (acquired firm turnover/acquiring firm turnover) of the final resulting 302 acquisitions with that of the initial population of 517 acquisitions. A t-test revealed no evidence of statistically significant bias (t = 0.42; p = 0.68: not significant). 2. By responding executive the completed response rate was 26%, which compares favourably with that obtained by similar studies. 3. The Cronbach’s Alpha for the individual dimensions ranged from 0.85 to 0.64. The reliabilities are considered reasonable given the context of the research and the arguments of Carmines and Zeller (1979) that Alpha can provide a conservative estimate of reliability. 4. The bivariate correlations also revealed the presence of a number of statistically significant relationships amongst the management style difference variables themselves. However, none of the relationships was large enough to raise concerns regarding multicollinearity (Hair et al., 1995). 5. Evidence towards the reliability of individual respondents’ perceptions is, in addition, provided by the high inter-rater agreement found in those cases where more than one executive from the acquiring firm submitted data.

ACKNOWLEDGMENTS I would like to thank David Norburn for his insightful comments and consistent support during the course of the Doctoral research on which this paper is based. Earlier versions of aspects of the work have been presented at conferences organised by the Strategic Management Society, the U.K. Region of the Academy of International Business and the British Academy of Management. I am grateful to all those who have provided valuable feedback, from which this paper has benefited.

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APPENDIX Management Style Differences Questionnaire Items Participation in (long term) strategic decisions Use of IT for tight formal control Reliance on external funds to finance growth Participation in product-related decisions Free adaptation to changing circumstances Use of structured communication channels Reliance on personal experience and judgement Importance of long term planning Emphasis on R&D and innovation Formally established procedures Close adherence to formal job descriptions Group-orientated consensus decision-making Use of sophisticated decision-making techniques Participation in capital budgeting decisions Proactive approach to management problems Risk profile of investments Long-term orientation in decision making


Acquisition Performance Questionnaire Items Return on investment Return on sales Asset utilisation Earnings per share Share price Cash flow Tax efficiency Growth in sales revenues Purchase of undervalued assets

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ACQUISITIONS AND INTANGIBLE RESOURCES: REPUTATIONS AS A MOBILE AND TRANSFERABLE ASSET Todd Saxton ABSTRACT Intangible assets and reputation play a considerable and complex role in acquisitions. Targets with better reputations are more attractive, yet may fetch a premium. Though the intangibles drive many transactions, the ability of an acquirer to leverage intangibles and reputation specifically after the transaction is more problematic. Two characteristics of reputation – mobility and transferability – are introduced to reflect the degree to which a target’s positive reputation may accrue to the buyer following an acquisition. Acquirer experience, hubris and cultural differences between acquirer and target may moderate the relationships between these characteristics of reputation and acquisition outcomes. Implications for practitioners are offered, including when acquiring firms should look for reputation capture vs. spillover, and when employee retention and internal communication should be the focus vs. integration and external communication.

INTRODUCTION Though acquisitions are a popular mechanism for achieving strategic objectives, the popular press and research findings on success rates paint a dim picture of Advances in Mergers and Acquisitions Advances in Mergers and Acquisitions, Volume 3, 177–191 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1479-361X/doi:10.1016/S1479-361X(04)03008-X

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the potential for these transactions. There are a host of explanations for this phenomenon, many of which have been well documented in the literature (Barney, 1988; Lubatkin, 1983; Sirower, 1997). The empirical evidence yields fairly conclusive findings that in the acquisition game, sellers win and buyers break even at best (Datta, Narayanan & Pinches, 1992; Jarrell, Brickley & Netter, 1988). One factor that has been mentioned but remains relatively unexplored theoretically and empirically is the impact of intangible resources, and reputation specifically, on acquisition dynamics (Arikan, 2002; Saxton & Dollinger, forthcoming). Intangible assets and reputation play a considerable and complex role in acquisitions. Targets with better reputations are more attractive; at the same time, such targets are likely to demand a price commensurate with their perceived value. The acquirer must, therefore, be able to capture those assets following the transaction to make the premium paid worthwhile. This ability may be contingent on many factors. The focus here is on the characteristics of the target firm’s reputation, and particularly those that affect the degree to which the reputation of the target may confer to the acquirer. This paper briefly reviews the literature on reputation and acquisitions. Two characteristics of reputation that are particularly relevant in the context of acquisitions are developed and defined: transferability and mobility. Propositions are offered regarding the relationships between these characteristics of reputation and acquisition outcomes. The contribution of the paper is to further explore theoretically the role of reputation in acquisition success, and specifically to identify characteristics of reputation that enable its conveyance to an acquirer. Acquisition experience, CEO hubris and cultural differences are identified as potential moderators of these relationships.

REPUTATION Reputation has emerged as a central construct in the strategic management literature (Fombrun & Shanley, 1990; Fombrun & Van Riel, 2004; Roberts & Dowling, 2002). A commonly accepted definition of reputation is “a perceptual representation of a company’s past actions and future prospects that describe the firm’s overall appeal to all its key constituents when compared to other leading rivals” (Fombrun, 1996, p. 72). As an intangible resource, reputation offers considerable potential as a rare, valuable, inimitable, and non-substitutable resource as described in the resource-based view of the firm (Barney, 1986; Wernerfelt, 1984). Reputation has been demonstrated to have a strong reciprocal relationship with financial performance (McGuire, Schneeweis & Branch, 1990). More recent

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research has documented that reputation has a significant positive effect on sustained financial performance as well (Roberts & Dowling, 2002). Hall’s study (1992) finds that a company may take 11 years to recover from a blow to its reputation. Specific incidents such as the Exxon Valdez oil spill, Union Carbide Bhopal disaster, and more recently Arthur Anderson’s involvement in Enron, reinforce the troublesome and even fatal consequences of a reputation-damaging event. Thus a strong positive reputation may confer long-term advantage; a poor one may hurt a firm’s prospects significantly. The role of reputation in transactions including alliances and acquisitions has received some research attention. A good reputation makes a potential alliance partner more attractive (Dollinger, Golden & Saxton, 1997; Parkhe, 1993) and has a positive impact on post-transaction outcomes (Saxton, 1997). Acquisition research suggests similar relationships; a positive reputation reduces the search and monitoring costs and signals the value of the asset acquired in a transaction (Saxton & Dollinger, 2004; Weigelt & Camerer, 1988). Those targets with a high relative standing (Frank, 1985; Hambrick & Canella, 1993) are more likely to attract a suitor, and possibly demand a premium. At the same time, buyers that pay a premium for intangible assets face short and long-term negative consequences from the transaction (Arikan, 2002; Coff, 1999). We could conclude that buying companies with highly intangible resources is a bad idea. This conclusion, though, seems limiting and shortsighted, and is unlikely to be adhered to in practice. The interesting and important research question that follows from the preceding observations, however, is this: Under what circumstances can an acquirer expect to capture the gains embedded in intangible resources? Did Unilever “acquire” a green image by buying Ben & Jerry’s? Could Nike have fixed its poor reputation for labor practices in the 1990s by acquiring Levi Strauss, a company lauded for its positive labor relationships? The process by which a reputation confers benefits to the initiator of a transaction has received little theoretical and virtually no empirical attention. This paper explores these dynamics, with a specific focus on identifying the characteristics of reputations that may allow positive stakeholder perceptions to accrue to an acquirer post-transaction, thereby allowing the acquirer to justify the premium paid for a target with a good reputation.

ACQUISITIONS Acquisitions have a long and varied history in strategic management research. From Rumelt’s (1974) early investigation of relatedness in diversification to more recent treatments of post-acquisition integration (Capron & Pistre, 2002), the

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research landscape has explored numerous aspects of causes and consequences of acquisitions. The focus of this book further reinforces the importance of acquisitions and the range of issues yet to be addressed in this important arena. A stream of acquisition literature that is particularly relevant to this discussion is post-transaction integration (Haspeslagh & Jemison, 1991; Porter, 1987). It is generally argued that rapid integration leads to better outcomes, because it is through this vehicle that “synergies” are realized (Bradley, Desai & Kim, 1983; Brush, 1996; Chatterjee, 1992). When markets fail, acquisitions allow for asset redeployment through combination with a different firm (Anand & Singh, 1997). At the same time, firms face considerable challenge realizing these potential synergies, and while executives hope 2 + 2 = 5, more often than not they come up with 3 – victims of the “synergy trap” (Sirower, 1997). Consistent with but extending this argument is the recognition that asset redeployment following a transaction should depend to some degree on the quality of the assets acquired (Capron, Dussauge & Mitchell, 1998; Capron, Mitchell & Swaninathan, 2001). Buyers with a strong relative position will be more likely to redeploy assets of a relatively weak target. This also follows the logic of relative standing (Hambrick & Canella, 1993). As applied to the acquisition context, this theory suggests that executives of acquired firms that have lower relative standing are more likely to leave – either voluntarily or through coercion. In sum, researchers and practitioners realize that post-transaction dynamics and integration of target into acquirer are critical to an acquisition’s success, but the complexities of this process – particularly as relates to intangible resources – need further investigation.

REPUTATION AND TARGET INTEGRATION: REPUTATION TRANSFERABILITY AND MOBILITY To extend this discussion to the role of reputation in acquisition outcomes requires that we identify and define two characteristics of reputation heretofore unexplored: transferability and mobility. I argue that these two characteristics determine the degree to which a buyer will be able to realize the benefits associated with acquiring a target with a positive reputation, and in turn diminish the chances that paying for intangible assets will negatively affect post-acquisition performance (Arikan, 2002). Reputation transferability. Reputation transferability is the degree to which an acquiring firm may realize benefits from the positive perceptions of the target firm among its key constituents after the transaction. Transferability is a latent construct that reflects potential. Unlike tangible assets that can be valued and


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exchanged in a transaction, intangible assets may not easily pass from target to buyer, despite the best intentions of both parties. For example, let’s say that United Airlines, a company that has struggled in recent times in key areas of employee relations and profitability, determined to improve its position in the marketplace through acquisition of Southwest, an airline that has been exceptional in the industry in its customer service, financial performance, and reputation (Heskett & Hallowell, 1993). Would the combination have the desired effect? Would the positive reputation of Southwest bolster United’s position, or would the union in fact simply weaken perceptions of Southwest’s future prospects? Certainly this is an empirical and theoretical question only (the author has no suspicion of a pending transaction!), but one would suspect that key constituents would be reluctant to come to conclusive judgment about the reputation of the combined entities without direct observation of ongoing actions. The uncertainty of the acquisition could in fact dilute the benefits of the high esteem Southwest has earned over time, because the transferability of this high esteem would be questionable. As a latent construct, transferability is not directly measurable. Two indicators may, however, provide indicators of this construct – the relative standing of target to the acquirer, and similarities in constituent populations. Relative standing refers to social status in a proximate setting (Frank, 1985), and yields insight into behavior in acquisitions (Hambrick & Canella, 1993). Relative standing has typically been invoked regarding the top management of acquiring vs. acquired firms. Research has established that relative standing does indeed affect top management departure following an acquisition, and specifically that top managers with lower relative standing are more likely to depart (see also Very, Lubatkin, Calori & Veiga, 1997). Saxton and Dollinger (2004) find that not only are managers with weaker reputations less likely to remain, but that acquisition outcomes are indeed enhanced by turnover of top management with weaker reputations. These authors extend the logic of relative standing to other dimensions of target reputation as well to find that acquisition of targets with a better reputation results in higher acquirer satisfaction. What has not been considered is whether and how this standing can yield long-term gains to the acquirer. I argue that in fact it is not just the reputation of the acquired firm, but how similar its reputation is to that of the acquiring firm. In considering reputation transferability, it is critical to consider the perceptions of the stakeholders who are assessing the target and acquirer’s reputation pre and post transaction. As a mental map of these perceptions, reputations can be fragile and subject to negative events or uncertainty (Fombrun & Van Riel, 2004). Reputation is in part a measure of future prospects (see definition), which may be clouded considerably by a merger. Acquisitions can create a great deal of uncertainty for

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stakeholders such as customers and employees. When the relative standing of the target and acquirer are very different, the result of an acquisition is likely to be cognitive dissonance in the mind of key stakeholders. Their willingness to act in a manner consistent with past behavior may be jeopardized by an acquisition, and the nature of the relationship with key stakeholders may undergo a transition as they adopt a “wait and see” approach to determining if the combined firm’s behavior is consistent with that separate past actions. An additional consideration is the degree to which the target and acquirer have overlapping stakeholders (e.g. customers, suppliers, distributors, stock market analysts). As reputation is a measure that is relevant in practice to key constituents of a firm, the transferability of that reputation will depend on how knowledgeable constituents are about both firms. If stakeholders overlap considerably, elements of reputation salient to the stakeholders’ assessment of one firm are likely to apply to both. On the other hand, if the two firms have very different stakeholders, it is unlikely that the positive reputation of the target could confer to the acquirer. In the United/Southwest example, the two firms may have relatively similar stakeholders (though specific customers my vary). The relative standing, though, is very different between the two companies, and transferability of reputation would be expected to be low.1 In sum, then, it is expected that reputation transferability will be important as a reflection of a firm’s ability to capture the intangible value of a target held in high esteem. The relative standing of target to acquirer and similarities in constituent populations are two predictors of transferability. Proposition 1. The degree of reputation transferability will affect acquisition performance such that acquisition of a target with a good reputation will be more successful when transferability is high. Reputation mobility. Reputation mobility is the degree to which intangible assets of the target firm are detachable from the organization and may leave after a transaction. Examples of highly mobile intangible assets include key employees and process knowledge embedded in individuals (Coff, 1997). Immobile assets, in contrast, might include patented technologies where the firm holds the patent rights and brand or corporate loyalty in the marketplace with consumers. As a brand, for example, Coca Cola is not likely to suffer significantly from the departure of an employee at any level. A professional services firm, on the other hand, may face the loss of key client relationships following the departure of an account executive (Seabright, Levinthal & Fichman, 1992). Generally, mobility is likely to be high in human asset intensive industries, where the key assets of a firm lie primarily in its employees. Coff’s work, among others, documents the challenges of making acquisitions successful in knowledge


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industries where the intangible assets are to a large degree resident in employees (Coff, 1999, 2002). As he notes, unlike tangible assets, people pose interesting challenges following an acquisition. They may leave, become dismotivated, or exhibit other behaviors counter to successful appropriation of intangible resources embedded in human assets (Coff, 1997). In these industries relationships between key stakeholders and the target firm, and hence its reputation, are likely to be operationalized at the individual level. As reputation is a measure based on past actions, in some industries those actions that are most salient are experienced through individual relationships, as opposed to at the aggregate or firm level. Law firms, consulting firms and medical practices represent professional service organizations that exemplify such a phenomenon. This corresponds, unfortunately, to the highest degree of reputation mobility – human assets have a much greater chance of departing, further compromising the perceived future potential among key stakeholders. In sum, the benefits of acquiring a target with a good reputation may depend on the degree to which the acquired reputation assets can leave. Proposition 2. The degree of reputation mobility will affect acquisition performance such that acquisition of a target with a good reputation will be more successful when mobility is low.

MODERATORS While the relationships above may be present as main effects, it is important to identify other boundary variables that potentially have an impact on these relationships (Fromkin & Streufert, 1983). Three variables of particular interest are the acquisition experience of the acquirer, the hubris of the acquiring CEO, and cultural differences between target and acquirer. These variables are described below, with additional propositions suggesting expected effects on the focal relationships. Acquirer experience. Research has suggested that the experience level of the acquiring firm may have significant bearing on its ability to realize superior returns from acquisitions (Haleblian & Finkelstein, 1999; Hayward, 2002). Part of the challenge in incorporating the benefits of intangible assets is that it is a learned skill. While acquirers may attempt to generalize from a small experience base (Finkelstein & Haleblian, 2002), acquisitions are complex. Learning theory suggests that experience effects may accrue to an acquirer, but that generalizing from a limited experience base can be dangerous – transfer effects are limited when the experience base is small. In fact, Haleblian and Finkelstein find a

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curvilinear relationship (U-shaped) between experience and performance, further reinforcing the complexity of this relationship. Experience would be particularly relevant for acquisition and transfer of intangible resources, which by their nature are difficult to codify. An inexperienced acquirer is likely to underestimate the difficulties involved in reputation transfer, and the mobility of the reputation assets that may leave. This could be compounded in the case of an acquirer that attempts to transfer experience between dissimilar acquisitions (Finkelstein & Haleblian, 2002). In fact, inferences about what “works” in an acquisition based on past experience can be limited temporally and based on outcomes as well (Hayward, 2002). In short, experience effects are complex in these transactions, but likely to affect the relationships between target reputation characteristics and acquisition outcomes. Proposition 3. The experience level of the acquirer will moderate the relationships between reputation transferability and mobility and performance. Specifically, firms with similar and more experience will have greater success realizing benefits from targets with good reputations. Hubris. Another variable associated with acquisition dynamics and particularly premiums paid for acquisition prospects is the hubris of the acquiring firm’s CEO (Hayward & Hambrick, 1997). Hubris, or exaggerated self-confidence, can lead overly ambitious CEOs to overpay for acquisition prospects. Hayward and Hambrick find four indicators of CEO hubris – recent performance, media praise, CEO self-importance, and a composite of all three – to be associated with premiums paid for acquisition targets. Further, acquiring firms losses were greater with higher levels of hubris. These authors note, quoting Warren Buffett, the proclivity for CEOs with a healthy ego to believe they can turn frogs into princes – or take a company with a poor reputation and uncover the prince inside. Extending the hubris effect, a CEO with an overly inflated sense of self worth is also likely to be attracted to firms with a positive reputation to “vanquish,” but at the same time be less appreciative of and sensitive to the target firm’s reputation with key constituents following the transaction. Phrased differently, the acquiring firm’s CEO may attribute a much lower relative standing of the target to the acquirer, and therefore force integration and asset redeployment to undesirable levels. Reputation transferability will suffer in such a scenario. Such a CEO is also likely to undervalue the human assets of the acquired firm, resulting in higher levels of departure of mobile assets. Proposition 4. The level of hubris of the acquiring CEO will moderate the relationships between reputation transferability and mobility and performance.


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Specifically, CEOs with a high level of hubris will have less success realizing benefits from targets with good reputations. Cultural differences. A final boundary variable that may affect these relationships is cultural differences between acquirer and target. Cultural differences, or differences in organizational processes and beliefs that render cooperation and combining resources problematic, are a common source of blame for alliance and acquisition failure. This phenomenon has received much anecdotal attention in the popular press (Business Week, October 30, 1995; The Economist, July 22, 2000) as well as some empirical efforts, though results have been inconsistent (e.g. Gomez-Mejia & Palich, 1997; Morosini, Shane & Singh, 1998; see also Larsson & Finkelstein, 1999). Cultural differences, as a reflection of different underlying beliefs and value structures, are likely to further exacerbate problems with reputation transferability. Acquiring firms are less able to appreciate the relationships a target has with key stakeholders when its value structures differ significantly (Larsson & Lubatkin, 2001). Further, mobile reputation assets are much more likely to depart when acquired by a firm that “just doesn’t understand.” For these reasons, it is reasonable to expect that intangible assets are even less likely to accrue to an acquirer when cultural differences are high. Proposition 5. Cultural differences between the target and acquirer will moderate the relationships between reputation transferability and mobility and performance. Specifically, firms with higher cultural differences (culture clash) will experience less success realizing benefits from acquiring targets with good reputations.

DISCUSSION AND CONCLUSION This paper set out with the goal of exploring theoretically the relationships between target reputation and acquisition performance. I argue that two characteristics of the target’s reputation – the transferability and mobility of its reputation – will affect the acquirer’s ability to reap the benefits of a good reputation following the transaction. These relationships will be further moderated by acquirer experience, CEO hubris, and the cultural compatibility between target and acquirer. The summary model is captured in Fig. 1. For research implications, the next step is careful empirical investigation of these relationships. Fortunately, measures of many of the central constructs exist. Reputation transferability is a latent construct, but may be assessed by examining relative standing and shared constituents as underlying indicators.

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Fig. 1. Summary Model of Relationships.

The Fortune rankings are a common source of reputation rankings (Roberts & Dowling, 2002), but many industry specific and other measures exist as well to yield relative standing (see Fombrun & Van Riel, 2004 regarding the reputation quotient, for example). Shared constituents can be measured by, for example, overlap in customer and supplier base, geographic market penetration, analyst or media coverage, and common competitors. Reputation mobility is latent as well, but may best be assessed by the degree to which assets are human, as indicated by average education and training of industry participants and similar measures (see Coff, 1999). As to the moderators, the extant research holds examples of measures of experience (Haleblian & Finkelstein, 1999), hubris (Hayward & Hambrick, 1997), and cultural differences (Kogut & Singh, 1988). It is important to recognize the dynamic nature of these relationships; any measures should reflect not only cross-sectional data, but longitudinal data as well incorporating particularly prior experience and relative standing (e.g. changes in reputation), and acquisition gains over time. While the aim is to advance our understanding of acquisition dynamics theoretically, and hopefully encourage empirical investigation into these issues, there are practical implications as well. For managers undertaking acquisitions, there are few guidelines to follow to increase the odds of making an acquisition work. This paper suggests relationships that can be investigated prior to a transaction, though, with some possible implications for post-transaction behavior. When reputations are similar and overlap in stakeholders is substantial, it is most likely


Fig. 2. Levels of Target Reputation Transferability and Mobility: Strategies for Post-acquisition Management. 187

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that reputation transferability will be high, and that benefits from high target esteem may convey to the buyer. In such cases, reputation capture is possible and acquirers should quickly and clearly communicate the acquisition to key stakeholders and redeploy assets. If, on the other hand, reputations or corporate cultures are not compatible, and/or stakeholders are dissimilar, caution should be taken in proceeding rapidly with such integration. Rather, stakeholders must be educated and reputations improved through action over time until a combination can realize its potential value. The goal is to allow the target reputation to maintain its integrity and look for opportunities for reputation spillover. Regarding reputation mobility, acquirers must carefully assess the degree to which human assets are critical to the high esteem in which the target is held. When mobility is high, these assets are likely to leave if the goals of the acquisition are not clearly communicated and efforts made to engage in internal communication and human resource policies to encourage and reward internal champions that help make the acquisition work. Retention should be the focus when reputation mobility is high. A realistic merger preview (Schweiger & Denisi, 1991) may be an appropriate tool for internal communication in such situations. When reputation is not mobile, acquirers should focus on integration – either selective or complete – and external communication. The timing of integration should be dependent on reputation transferability and the acquisition experience of the buyer – less experienced acquirers of targets with dissimilar reputations or in different market space should proceed slowly and cautiously. Figure 2 captures key acquisition strategies under various combinations of these conditions. Acquisitions are an integral part of the strategic landscape, and are not likely to disappear. Yes, a majority of acquisitions fail; the interesting question, though, is what factors lead to those that are successful? It is critical that researchers seek theoretical explanations that help us identify such factors and understand their implications. I suggest here that reputation is one construct that has not received adequate research attention in the context of acquisitions. By better understanding the characteristics of target reputation and their determinants, we can explore how target reputation can confer to an acquirer. In doing so, we contribute to the research on reputation and acquisitions, with significant practical implications as well. This paper takes a small step in the direction of exploring these relationships.

NOTE 1. Certainly other factors such as Southwest’s use of a spiderweb versus United’s hub and spoke system would limit strategic benefits of a combination. The focus here, though, is on the conveyance of reputation benefits specifically.


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REFERENCES Anand, J., & Singh, H. (1997). Asset redeployment, acquisitions and corporate strategy in declining industries. Strategic Management Journal, 18(Summer Special Issue), 99–118. Arikan, A. (2002). Does it pay off to capture intangible assets through mergers and acquisitions? Academy of Management Proceedings. Academy of Management Meetings, Denver. Barney, J. (1986). Strategic factor markets: Expectations, luck and business strategy. Management Science, 32, 1231–1241. Barney, J. (1988). Returns to bidding firms in mergers and acquisitions: Reconsidering the relatedness hypothesis. Strategic Management Journal, 9, 71–78. Bradley, M. A., Desai, A., & Kim, E. H. (1983). The rationale behind interfirm tender offers: Information or synergy? Journal of Financial Economics, 11, 183–206. Brush, T. H. (1996). Predicted change in operational synergy and post-acquisition performance of acquired businesses. Strategic Management Journal, 17(1), 1–24. Capron, L., Dussauge, P., & Mitchell, W. (1998). Resource deployment following horizontal acquisitions in Europe and North America, 1988–1992. Strategic Management Journal, 19(7), 631–662. Capron, L., Mitchell, W., & Swaminathan, A. (2001). Asset divestiture following horizontal acquisitions: A dynamic view. Strategic Management Journal, 22(9), 817–844. Capron, L., & Pistre, N. (2002). When do acquirers earn abnormal returns? Strategic Management Journal, 23(9), 781–794. Chatterjee, S. (1992). Sources of value in takeovers: Synergy or restructuring – Implications for target and bidder firms. Strategic Management Journal, 13(4), 267–286. Coff, R. (1997). Human assets and management dilemmas; Coping with hazards on the road to resource-based theory. Academy of Management Review, 22(2), 374–402. Coff, R. (1999). How buyers cope with uncertainty when acquiring firms in knowledge-intensive industries: Caveat emptor. Organization Science, 10(2), 144–161. Coff, R. (2002). Human capital, shared expertise, and the likelihood of impasse in corporate acquisitions. Journal of Management, 28(1), 107–126. Datta, D. K., Narayanan, V. K., & Pinches, G. E. (1992). Factors influencing wealth creation from mergers and acquisitions: A meta-analysis. Strategic Management Journal, 13, 67–83. Dollinger, M. D., Golden, P., & Saxton, T. (1997). The effect of reputation on the decision to joint venture. Strategic Management Journal, 18, 127–140. Finkelstein, S., & Haleblian, J. (2002). Understanding acquisition performance: The role of transfer effects. Organization Science, 13(1), 36–47. Fombrun, C. (1996). Reputation: Realizing value from the corporate image. Boston, MA: Harvard Business School Press. Fombrun, C., & Shanley, M. (1990). What’s in a name? Reputation building and corporate strategy. Academy of Management Journal, 33, 233–258. Fombrun, C., & Van Riel, C. B. M. (2004). Fame and fortune: How successful companies build winning reputations. Upper Saddle River, NJ: Prentice-Hall. Frank, R. H. (1985). Choosing the right pond: Human behavior and the quest for status. New York: Oxford University Press. Fromkin, H. L., & Streufert, S. (1983). Laboratory experimentation. In: M. D. Dunnette (Ed.), Handbook of Industrial and Organizational Psychology (pp. 415–466). New York: Wiley.

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Gomez-Mejia, L. R., & Palich, L. E. (1997). Cultural diversity and the performance of multinational firms. Journal of International Business Studies, 28(2), 309–335. Haleblian, J., & Finkelstein, S. (1999). The influence of organizational acquisition experience on acquisition performance: A behavioral perspective. Administrative Science Quarterly, 44, 29–56. Hall, R. (1992). The strategic analysis of intangible resources. Strategic Management Journal, 13, 135–144. Hambrick, D. C., & Canella, A. A. (1993). Relative standing: A framework for understanding departures of acquired executives. Academy of Management Journal, 36(4), 733–762. Haspeslagh, P. C., & Jemison, D. B. (1991). Managing acquisitions. New York: Free Press. Hayward, M. L. A. (2002). When do firms learn from their acquisition experience? Evidence from 1990–1995. Strategic Management Journal, 23(1), 21–40. Hayward, M. L. A., & Hambrick, D. C. (1997). Explaining the premium paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42(1), 103–127. Heskett, J. L., & Hallowell, R. (1993). Southwest Airlines. Cambridge, MA: Harvard University Press. Jarrell, G. A., Brickley, J. A., & Netter, J. M. (1988). The market for corporate control: The empirical evidence since 1980. Journal of Economic Perspectives, 2, 49–68. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411–432. Larsson, R., & Finkelstein, S. (1999). Integrating strategic, organizational, and human resource perspectives on mergers and acquisitions: A case study of synergy realization. Organization Science, 10, 1–26. Larsson, R., & Lubatkin, M. (2001). Achieving acculturation in mergers and acquisitions: An international case study. Human Relations, 54(12), 1573–1607. Lubatkin, M. (1983). Mergers and the performance of the acquiring firm. Academy of Management Review, 8, 218–225. McGuire, J. B., Schneeweis, T., & Branch, B. (1990). Perceptions of firm quality: A cause or result of firm performance. Journal of Management, 16, 167–180. Morosini, P., Shane, S., & Singh, H. (1998). National cultural distance and cross-border acquisition performance. Journal of International Business Studies, 29(1), 137–158. Parkhe, A. (1993). “Messy” research, methodological predispositions, and theory development in international joint ventures. Academy of Management Review, 18(2), 227–268. Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, (May–June), 43–59. Roberts, P. W., & Dowling, G. R. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23(12), 1077–1094. Rumelt, R. P. (1974). Strategy, structure, and economic performance. Cambridge, MA: Harvard University Press. Saxton, T. (1997). The effects of partner and relationship characteristics on alliance outcomes. Academy of Management Journal, 40, 443–461. Saxton, T., & Dollinger, M. (2004). Target reputation and appropriability: Picking and deploying resources in acquisitions. Journal of Management, 30(1), 123–147. Schweiger, D. M., & Denisi, A. S. (1991). Communication with employees following a merger: A longitudinal field experiment. Academy of Management Journal, 34(1), 110–135. Seabright, M. A., Levinthal, D. A., & Fichman, M. (1992). The role of individual attachments in the dissolution of interorganizational relationships. Academy of Management Journal, 35, 122–160.


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Sirower, M. L. (1997). The synergy trap: How companies lose the acquisition game. New York: Free Press. Very, P., Lubatkin, M., Calori, R., & Veiga, J. (1997). Relative standing and the performance of recently acquired European firms. Strategic Management Journal, 18(8), 593–614. Weigelt, K., & Camerer, C. (1988). Reputation and corporate strategy: A review of recent theory and application. Strategic Management Journal, 9, 443–454. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

MERGERS AND ACQUISITIONS AND CORPORATE GOVERNANCE Anant K. Sundaram Ever since Professor Henry Manne coined the phrase “the market for corporate control” in 1965, the phenomenon of mergers & acquisitions (M&A) has been closely associated with corporate governance.1 In his article, Manne (1965, p. 113) developed a straightforward argument that, by hindsight, seems obvious: “The lower the stock price, relative to what it could be with more efficient management, the more attractive the takeover becomes to those who believe that they can manage the company more efficiently. And the potential return from the successful takeover and revitalization of a poorly run company can be enormous.” Thus was the born that notion that in economies with active markets for corporate control, shareholders of poorly governed companies will sell, thereby lowering share prices in the financial marketplace, with the lower prices creating the incentive for outsiders to accumulate control rights, replace the incumbents, and restructure the firm to create value for themselves. Thus was also born the study of the links among takeovers, corporate governance, and firm performance. In the process, these links have come to be among the most extensively researched topics in the fields of finance and strategic management. Masterful summaries of this research chronicle evidence from the 1970s (Jensen & Ruback, 1983), the 1980s (Jarrell, Brickley & Netter, 1988), and the 1990s (Andrade, Mitchell & Stafford, 2001), revealing a few recurrent and compelling themes that are now accepted as conventional wisdom:2 On average, target shareholders gain, while acquirer shareholders break even (they may even lose slightly); the ability to capture takeover gains remain elusive, and


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value creation is difficult – acquirers should prepare to be disappointed; hubris, empire-building, and overconfidence are as common a set of takeover motivations as are synergy gains; combined acquirer and target shareholder wealth effects are positive; the medium of exchange matters: announcements of stock-based acquisitions send negative market signals, while that of cash-based acquisitions send small positive signals; poorly performing targets are more likely to be subject to takeover bids; bad bidders may subsequently become potential takeover targets themselves. Many of these issues have been addressed in great depth in the companion chapters in this Volume. Buying and selling companies and divisions entail perhaps the most important set of decisions in the life of a firm, involving as it does a set of consequences that are interlinked with just about every aspect of a firm’s strategy and operations, even its very existence. In the past two decades M&A has arguably become the most important means by which firms the world over are implementing strategies to grow their businesses. During the period January 1980 to January 2000, worldwide, there were nearly 70,000 completed M&A transactions for a total US$ value approaching $9 trillion (we will examine the data there in more detail later). During this period, transactions that involved just a U.S. firm as either an acquirer or a target accounted for well over half of the number and nearly 70% in value, suggesting that the U.S. market for corporate assets is by far the most mature.3 To put these numbers in perspective, consider that the U.S. economy accounts for about a third of the world’s GDP. The purpose of this Chapter is to examine the market for corporate control from the standpoint of its links to corporate governance. Specifically, it seeks to examine the following questions: What role does M&A play in corporate governance? How does this role complement or conflict with the role that other governance mechanisms can play? What are the theoretically postulated governance roles for M&A, and how well have these postulates been borne out in practice? Is the conventional wisdom really correct – i.e. is it indeed true that markets perceive value-creation from M&A with skepticism? What do we know about the types of M&A that can create value for the acquirer? Conversely, are there situations in which M&A activity could mask or even encourage poor governance practices? How can we identify such types of M&A? Admittedly, this is an ambitious menu. Hence, it would be somewhat foolish to presume that we can comprehensively address every single one. This Chapter has a more modest goal: That goal is to attempt to adequately address the answers to these questions. In the process of doing so, some selectivity is unavoidable. In particular, it is important to distinguish between governance issues that arise in the case of the acquirer (e.g. the type of asset bought, price paid, the role of CEO motivations, the medium of exchange, the role of the board) versus those that

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arise in the case of the target (e.g. the use and abuse of takeover defenses, the role of change-of-control compensation contracts, the role of various Delaware court rulings, the role of alternative constituency statutes). This Chapter will primarily focus on the former, i.e. governance issues that arise in the case of the acquiring firm. We will address target-related governance issues only in passing. Moreover, with some initial exceptions, most of the detailed evidence in this Chapter will focus on what we know from the U.S. context. The Chapter is structured as follows. First, with a view to make it self-contained, it begins with a definition of “corporate governance,” discusses the menu of mechanisms by which the corporation can be governed, and examines the role that M&A plays. It then marshals aggregate U.S. and non-U.S. evidence on the number, values, and types of completed M&A activity worldwide, starting in 1980 with a view to draw broad inferences for the links between M&A and corporate governance. Next, it examines the evidence on market reactions to specific types of M&A announcements to get a sense of how – and more importantly, why – particular types of M&A might be viewed by financial markets as reflecting value-creating governance practices while others reflect governance shortcomings. It summarizes the evidence, and examines the implications of the evidence – both the aggregate evidence and that based on market reactions – for boards and managements of both acquirers and targets (the latter only briefly). The Chapter concludes with a brief discussion of the challenges that lie ahead.

CORPORATE GOVERNANCE AND ROLE OF M&A Corporate Governance: A Definition “Corporate governance” refers to the top management process that manages and mediates value creation for, and value transference among, various corporate claimants (including the society-at-large), in a context that simultaneously ensures accountability toward these claimants (Sundaram, Bradley, Schipani & Walsh, 2000, p. 112). Several key aspects of the definition are worth noting. Corporate governance is a process rather than an outcome. Governance is explicitly in the top management realm. Corporate governance practices define the role of the boards and officers of the corporation, and account for a considerable portion of the job description of a CEO. In the modern corporation, at least in principle, no major strategy can be formulated for implementation without it being vetted and approved by the board. The definition emphasizes both value creation and value transference.

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Value creation is the basic purpose of all corporate activity. While the concept of “value” is left vague in the definition above, it captures the idea of economic value and hence, “profits,” and, in turn, efficiency. Obviously, a necessary condition of “good” governance is a focus on profits and efficiency. However, the existence of value implies the existence of economic rents, and in the presence of multiple claimants, they raise distributional issues. Good governance therefore also implies, even requires, some form of “fair” and “equitable” value distribution. Thus, as with all large socio-economic questions, the methods and avenues to deal with questions of both efficiency and equity are at the heart of governance. The definition also emphasizes the role of both claimants and accountability. The claimants in the corporation are stakeholders who, through either their implicit or explicit economic relationships with the firm, stake a claim to corporate revenues and cash flows. Such claimants include shareholders, employees, customers, creditors, suppliers, competitors, and even the society-at-large. Governance is a two-way street. As the corporation is responsible for its stakeholders, governance practices also simultaneously determine the process by which the firm’s stakeholders (including the society-at-large) monitor and control the firm. In much of the finance and strategic management literature, the definition of corporate governance has been viewed through the lens of an “agency” problem resulting from the separation of ownership and control between the firm and its capital providers.4 However, as we see from the definition above, corporate governance is much more than simply the relationship between the firm and its capital providers. CEOs and boards surely concern themselves with a much larger menu of issues. We can obtain a better understanding of why (and how) as we examine the main external and internal mechanisms of corporate governance.

Mechanisms of Corporate Governance and the Role of M&A Governance mechanisms can be broadly grouped into those that are internal to the firm, and those that are external. Although both sets of mechanisms are present in many instances, we can view them as being substitutes: If internal mechanisms ensure that the corporation is well-governed, external mechanisms presumably need to play a background role. The role of external mechanisms become more important when internal mechanisms fail or are deficient. The most important internal mechanisms of corporate governance are: the structure and role of the boards, the role of the CEO vis-à-vis the board, the nature


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of employment practices, and the nature of internal control systems and incentive systems in place to measure and reward the performance of employees of the firm. The role of boards in the governance process is central. In most corporate economies, it is the board of directors that is charged with the task of mediating and managing the trade-offs among stakeholders, the task of approving strategy and budgets, and the task of setting compensation. The board is also responsible for ensuring that the firm acts in a legal and socially responsible manner. Key questions in understanding the role of boards include issues of board composition, board size, whether non-equity constituencies are represented, and whether the board is independent. CEOs, as the ultimate go-betweens for company management and boards, play a crucial role in governance. For example, are they just responsible for the executive functions in the firm or are they also in control of the board, its appointment, and its actions? Compensation and control systems are important in that they are responsible for aligning the reward (and punishments) systems to the goals of the firm. For instance, are managers paid with fixed salaries and bonuses, or are they also compensated with stocks and stock options? The latter type of compensation would presumably better align managers’ and shareholders’ interests, if the goal of the firm is to create shareholder value. Similarly, what is the role of performance-related versus performance-unrelated compensation (such as golden parachutes for top management in the event of a change of control)? The internal governance issue that is perhaps the most important from the standpoint of the day-to-day operations of the firm is the nature of employment practices. Typical questions here include: How are employees hired and promoted? How is their human capital built and retained? How long do they stay with the firm? Does the firm have a relationship-based contract with its employees, or does it hire and fire at will? But all of these internal mechanisms operate in an external environment. There are at least four important external mechanisms of corporate governance: capital markets, product markets, managerial labor markets, and the market for corporate control. External capital markets – both equity and debt markets – exercise discipline both because firms have to subject themselves to its scrutiny when they wish to raise external funds, and because financial markets help determine the structure of equity ownership. The source of product market discipline is obvious: In competitive economic systems, firms that cannot consistently produce (relative to their competition) cheaper, faster, better, and more innovative products that the consumer demands will not survive. Competition will ensure that only the “fit” survive. Similarly, managerial labor markets ensure that managers from better-performing firms will be rewarded and worse-performing firms penalized by their “price” in the marketplace.

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Arguably, the most important and prevalent external mechanism of governance and the most widely discussed in both the finance and strategy literatures – at least in the Anglo-American system of corporate governance – is the role played by the market for corporate control. As we have already noted, with an active market for corporate control, shareholders of poorly governed companies can sell their shares, thereby lowering share prices in the financial marketplace, with the lower prices creating the incentive for outsiders to accumulate control rights, replace the incumbents, and restructure the firm. This market ensures that underperformers and their managers will get weeded out through acquisitions, and that acquiring firms will extract higher value and synergies from these firms by putting them to more efficient uses; i.e. by reducing costs and increasing revenues. An active market for corporate control ensures that such a threat will be present, and the threat is presumed to be sufficient to ensure governance discipline. The arguments for an effective market for corporate control implicitly assume that: (1) There will always be the credible threat of a hostile takeover that will act as a substitute for failures in internal mechanisms of governance, and those that managerial labor markets, financial markets, and product markets do not or cannot correct; (2) The institutional environment that consists of regulations and laws, or takeover defenses that targets can mount, will not inhibit the existence of such a threat; and (3) Such takeovers will be done for the “right” reasons, i.e. for the reason that markets ensure that assets will be put to their most efficient uses. We cannot take for granted that these assumptions always hold. The threat of hostility can disappear for numerous reasons. Potential acquirers may be unwilling or unable to use the method of hostile takeover if they are using stock rather than cash as the medium of exchange. If a private (as opposed to public) target acquisition is being considered, hostility may not be an option since such targets often have a majority (as in the case of an owner-managed private firm) or even 100% (as in the case of a division of a larger company) equity owner who can exercise the right not to sell. The target firm can respond with defenses such as poison pills (shareholder rights plans that issue new shares to non-threatening shareholders in the event of someone acquiring a “control” threshold), white knight strategies (preemptively seeking out a friendly buyer), poison outs (clauses in target’s debt or other contracts that get triggered by a change of control), crown jewel strategies (selling off attractive divisions or assets to others), defensive recapitalizations (loading up with debt by repurchasing shares to make themselves unattractive), greenmail (targeted share repurchases), staggered boards (whereby only a certain proportion of the incumbent board can be removed at any time, thus rendering ineffective the threat of a proxy contest), and so forth. Laws and regulations can also deter the market for corporate control. For instance, nearly 30 U.S. states have


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enacted “alternative constituency” statutes that can thwart an acquirer’s moves by appealing to the impact of the takeover on non-shareowning constituencies; many Delaware court rulings (such as those resulting in the “just say no” defense) have given incumbent boards wide berth to reject bids by appealing to possible strategic demerits of the takeover (as they view it); many U.S. states require supermajorities (e.g. Delaware requires 85%) for tender offers to succeed in the event that the target board rejects the offer. Takeover motivations can differ too. While we might like to believe that managers live in a Manne-sian, efficiency- and synergy-seeking world and would not consciously waste trillions of dollars of their owners’ wealth, plenty of other motivations are possible. In a persuasive article, Roll (1986) examined the sum total of M&A evidence and concluded that perhaps the most compelling explanation for growth by acquisitions is CEO hubris.5 Similarly, Shleifer and Vishny (2001) argue that many acquisitions are, in fact, “stock-market driven” – i.e. managers capitalize on their temporarily overvalued stock prices to pursue acquisitions only to “tangible-ize” such overvaluation (to coin a word), thus pre-empting the market’s subsequent valuation reversal and correction back to fundamentals. Conversations with numerous CEOs and investment bankers over the years reveal yet another common (but rarely researched!) reason: Acquirers want a particular target because they do not want their competitors to have it. Sometimes, less savory reasons, such as being to able to exercise anticompetitive market power or increase top management compensation (since firm size is highly correlated with CEO compensation) lead to acquisitions. Thus, as with any market-driven phenomenon, the market for corporate control is a double-edged sword. While it can, in principle, be a potent force for correcting managerial inefficiencies and poor governance practices, there are also situations in which it can abet or encourage such practices. We turn next to the aggregate evidence in this regard during the 1980s and the 1990s, with a view to examine which of these two roles it has, in fact, played.

STRUCTURE AND TYPES OF M&A ACTIVITY DURING THE 1980s AND THE 1990s Although there were at least three other acquisition “waves” in the U.S. during the 20th century, the level, pace, and the worldwide scope of M&A activity that began gathering steam during the early 1980s and, after a brief lull, resumed during the second half of the 1990s was the most impressive. Based on an analysis of the M&A database from Securities Data Corporation, we see from Table 1 that there were 68,621 M&A transactions worldwide during these two decades, for a

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Table 1. Total Number and Value of Acquisitions During the 1980s and 1990s by Acquirer/Target Location (Value in $ Billions; Percentages are Those of “All” for Each Decade). Decade

U.S. Target 1980s

Number U.S. acquirer

1980s 1990s

8569 (66.3%)

Non-U.S. acquirer

1980s 1990s

1403 (10.9%)

All acquires

1980s 1990s

Non-U.S. Target 1990s

1980s

1990s

2892 (5.2%) 2746 (21.2%)

2745 (4.9%)

27137 (48.7%) 12926 (100.0%) 55695 (100.0%) 68621

$1,248.1 (70.3%)

Non-U.S. acquirer

1980s 1990s

$229.6 (12.9%)

All acquires

1980s 1990s

$21.2 (1.2%) $3,684.8 (52.1%)

$330.6 (4.7%) $276.6 (15.6%)

$534.0 (7.6%)

$2,520.6 (35.7%) $1,775.5 (100.0%) $7,070.0 (100.0%) $8,845.5

Note: Acquisitions’ refers to completed deals in SDC “deal type” categories 1, 3, 4, and 11. “1980s” refers to the period January 1980 to January 1, 1990 (and similarly for “1990s”). Source: Securities Data Corporation, Thompson Financial Research; author’s analysis.

ANANT K. SUNDARAM

1980s 1990s

Total for 1980s and 1990s

1990s

208 (1.6%) 22921 (41.2%)

Total for 1980s and 1990s Value U.S. acquirer

All Targets 1980s


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total value US$8,845 billion.6 Of this, the 1980s accounted for about one-fifth of the total number and value, while the 1990s accounted for four-fifths. During the 1980s, M&A transactions that involved a U.S. firm as either an acquirer or target accounted for almost 80% of all transactions (and 85% of the value) – in other words, M&A activity that took place outside the U.S. (i.e. non-U.S. targets being acquired by non-U.S. acquirers) accounted for less than one-fifth. Thus, the 1980s was the “U.S.” decade of the growth and maturation of M&A as a major tool for strategy implementation. However, the rest of the world saw a dramatic rise in M&A activity during the 1990s: The number of non-U.S. acquisitions of non-U.S. targets grew nearly ten-fold from about 2,700 in the 1980s to over 27,000 in the 1990s, while it grew slightly less than three-fold in the U.S. during the same periods. During the 1990s, the non-U.S. market for M&A accounted for almost half the total number and almost 36% of the value of all M&A transactions worldwide. Thus, within a decade of the phenomenon maturing in the U.S., it appears to have caught on in the rest of the world too, as a major tool for strategy implementation.7 As we will see in more detail in the next section, there is some bias in a substantial amount of M&A research, in that it has almost exclusively focused on public target acquisitions (i.e. targets whose stocks trade on a public stock exchange).8 The reason is that it is easier for researchers to obtain (and therefore analyze) target company data when it is publicly traded, and the implicit presumption is that the insights from such analysis are also applicable to the non-public realm.9 But there are some important differences for the acquirer in public-target versus non-public target acquisitions, rendering such an assumption questionable (more on this later). In order to examine this further, Table 2 breaks down the data in Table 1 by public versus non-public target acquisitions. The results are striking: During the two-decade period only 16% of the acquisitions done worldwide were those of public targets; this proportion was 22% in the 1980s, and the relative importance of public target acquisitions declines to 14% during the 1990s. The proportions by value tell a different story. Although public target acquisitions are less than a fifth of the number, reflecting the fact that public companies tend to be much larger than non-public companies and divisions, they account for approximately half of the total value of acquisitions. The data are quite similar for both U.S. and non-U.S. M&A activity. Thus, in attempting to understand M&A and its implications for governance from the standpoint of the acquirer, to consciously or otherwise focus just on public targets – as much of the past research has done – is to throw away nearly 58,000 of the approximately 70,000 relevant data points during this period!10 Doing so jettisons a large slice of the acquisition experience, and

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Table 2. Number and Value of Acquisitions During the 1980s and 1990s by Target Public Status and Acquirer/Target Location (Value in $ Billions). Decade

Public Targets

Non-public Targets

All Targets

Number

Percent

Number

Percent

Number

Percent

1980s 1990s Both

2076 3435 5511

24.2 15.0 17.5

6493 19486 25979

75.8 85.0 82.5

8569 22921 31490

100.0 100.0 100.0

U.S. firms acquiring non-U.S. targets

1980s 1990s Both

25 399 424

12.0 13.8 13.7

183 2493 2676

88.0 86.2 86.3

208 2892 3100

100.0 100.0 100.0

Non-U.S. firms acquiring U.S. targets

1980s 1990s Both

298 329 627

21.2 12.0 15.1

1105 2416 3521

78.8 88.0 84.9

1403 2745 4148

100.0 100.0 100.0

Non-U.S. firms acquiring non-U.S. targets

1980s 1990s Both

448 3976 4424

16.3 14.7 14.8

2298 23161 25459

83.7 85.3 85.2

2746 27137 29883

100.0 100.0 100.0

All acquisitions

1980s 1990s Both

2847 8139 10986

22.0 14.6 16.0

10079 47556 57635

78.0 85.4 84.0

12926 55695 68621

100.0 100.0 100.0

1980s 1990s Both

$649.4 $2,152.2 $2,801.6

52.0 58.4 56.8

$598.7 $1,532.6 $2,131.3

48.0 41.6 43.2

$1,248.1 $3,684.8 $4,932.9

100.0 100.0 100.0


1980s 1990s Both

$4.9 $121.4 $126.3

23.1 36.7 35.9

$16.3 $209.1 $225.4

76.9 63.3 64.1

$21.2 $330.5 $351.7

100.0 100.0 100.0


1980s 1990s Both

$108.9 $302.0 $410.9

47.4 56.6 53.8

$120.7 $232.0 $352.7

52.6 43.4 46.2

$229.6 $534.0 $763.6

100.0 100.0 100.0


1980s 1990s Both

$127.6 $1,117.4 $1,245.0

46.1 44.3 44.5

$149.0 $1,403.2 $1,552.2

53.9 55.7 55.5

$276.6 $2,520.6 $2,797.2

100.0 100.0 100.0

All acquisitions

1980s 1990s Both

$890.8 $3,693.0 $4,583.8

50.2 52.2 51.8

$884.7 $3,376.9 $4,261.6

49.8 47.8 48.2

$1,775.5 $7,069.9 $8,845.4

100.0 100.0 100.0

Number U.S. firms acquiring U.S. targets

Value U.S. firms acquiring U.S. targets

Note: Acquisitions’ refers to completed deals in SDC “deal type” categories 1, 3, 4, and 11. “1980s” refers to the period January 1980 to January 1, 1990 (and similarly for “1990s”). Public’ target implies that the target firm is listed on a stock exchange. Source: Securities Data Corporation, Thompson Financial Research; author’s analysis.


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hence governance implications associated with that experience, in the life of a typical acquirer. (We examine differences in market reactions to the two types of acquisitions and their implications for corporate governance in more detail in the next section.) Table 3 examines the data broken down by deal attitude: i.e. whether the acquisition was “hostile” or non-hostile.11 Using the SDC definition of hostility, we see that approximately 5% of the public target acquisitions completed by U.S. acquirers (of U.S. targets) was hostile during the 1980s; this proportion falls to less than 1.5% during the 1990s.12 However, what is quite interesting (and perhaps surprising, since it is often assumed that the institution of the “hostile takeover” is a largely U.S. invention) is that non-U.S. firms undertook relatively more hostile acquisitions (as percentage of total) than U.S. firms did during this period: However, as in the case of U.S. acquirers, there was a fall-off in the proportion of hostile acquisitions, undertaken by non-U.S. acquirers. And perhaps unsurprisingly, non-public targets are rarely the object of a hostile takeover; during these two decades, only one-tenth of 1% of all acquisitions worldwide of non-public targets was hostile. Andrade et al. (2001) and Holmstrom and Kaplan (2001) compare the medium of exchange, types of bids, and whether bids are contested for U.S. public targets during the 1980s versus the 1990s. In the 1980s, approximately 33% of all public target acquisitions were done with all stock, and about 46% used at least some stock; these percentages went up to 58 and 71%, respectively, during the 1990s. In the 1980s, there were 1.6 bids per deal, while this number fell during the 1990s to 1.2 (and the number of bidders per deal fell from 1.2 to 1.0). They also report that related acquisitions went up from 40% of all deals to 48% between the two periods. Holmstrom and Kaplan (2001) note that acquisitions during the 1980s used much more leverage compared to the 1990s, and the 1980s saw high levels of leveraged buyouts (which virtually disappeared in the 1990s). Thus, summing up the aggregate evidence from the 1980s in relation to the 1990s, we observe that: M&A activity grew by a factor of four (as measured by the number of deals) during the 1990s compared to the 1980s; M&A activity became a global phenomenon during the 1990s, while it was largely a U.S. phenomenon during the 1980s. Acquisitions of non-public targets substantially outnumbered those of public targets during both eras, both in the U.S. and abroad; non-public target acquisitions are rarely hostile. Hostility declined dramatically in the U.S. during the 1990s relative to the 1980s; contrary to popular belief, non-U.S. firms were as likely (if not more) to engage in hostile transactions;

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Table 3. Hostile Acquisitions During the 1980s and 1990s by Target Public Status and Acquirer/Target Location (Value in $ Billions). Decade

Public Targets Number Hostile

Hostile as % Public

1980s 1990s Both

105 46 151

5.1 1.3 2.7


1980s 1990s Both

1 16 17


1980s

Non-public Targets

All Targets

Hostile as % Non-public

Number Hostile

Hostile as % Public + Non-public

6 3 9

0.1 0.0 0.0

111 49 160

1.3 0.2 0.5

4.0 4.0 4.0

1 1 2

0.5 0.0 0.1

2 17 19

1.0 0.6 0.6

25

8.4

2

0.2

27

1.9

1990s Both

7 32

2.1 5.1

0 2

0.0 0.1

7 34

0.3 0.8


1980s

48

10.7

13

0.6

61

2.2

1990s Both

177 225

4.5 5.1

14 27

0.1 0.1

191 252

0.7 0.8

All acquisitions

1980s 1990s Both

179 246 425

6.3 3.0 3.9

22 18 40

0.2 0.0 0.1

201 264 465

1.6 0.5 0.7

1980s 1990s Both

$111.0 $54.2 $165.2

17.1 2.5 5.9

$1.6 $2.5 $4.1

0.3 0.2 0.2

$112.6 $56.7 $169.3

9.0 1.5 3.4


1980s 1990s Both

$0.2 $8.3 $8.5

4.1 6.8 6.7

$0.1 $0.1 $0.2

0.6 0.0 0.1

$0.3 $8.4 $8.7

1.4 2.5 2.5


1980s

$44.2

40.6

$0.1

0.1

$44.3

19.3

1990s Both

$5.5 $49.7

1.8 12.1

– $0.1

0.0 0.0

$5.5 $49.8

1.0 6.5


1980s

$37.3

29.2

$4.7

3.2

$42.0

15.2

1990s Both

$80.7 $118.0

7.2 9.5

$1.0 $5.7

0.1 0.4

$81.7 $123.7

3.2 4.4

All acquisitions

1980s 1990s Both

$192.7 $148.7 $341.4

21.6 4.0 7.4

$6.5 $3.6 $10.1

0.7 0.1 0.2

$199.2 $152.3 $351.5

11.2 2.2 4.0

Number U.S. firms acquiring U.S. targets

Value U.S. firms acquiring U.S. targets

Number Hostile

Note: “Acquisitions” refers to completed deals in SDC “deal type” categories 1, 3, 4, and 11. “1980s” refers to the period January 1980 to January 1, 1990 (and similarly for “1990s”). “Public” target implies that the target firm is listed on a stock exchange. “Hostile” is as defined by the SDC database. Source: Securities Data Corporation, Thompson Financial Research; author’s analysis.


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and their levels of hostile takeover activity did decline during the 1990s as it did in the case of U.S. firms. The use of stock rather than cash rose during the 1990s, as did the number of related acquisitions; the use of leverage (and LBOs) declined. Bids were less likely to be contested during the 1990s compared to the 1980s.

We will explore the corporate governance implications of this evidence in a later section, after first examining how the stock market reacted to M&A announcements during the 1980s and the 1990s, broken down by deal structure, medium of exchange used, target size relative to acquirer size, target public status, and relatedness.

MARKET REACTIONS TO M&A ANNOUNCEMENTS The announcement effects of M&A events have been widely studied. A vast majority of the studies have, however, focused on public target acquisitions. As previously noted, part of the reason for this is that the data are easier to obtain in the case of public targets, and the implicit assumption is that the insights from public target acquisitions will readily carry over to the non-public setting as well. We will see in this section that the evidence relating to these two types of acquisitions is in fact quite different, with fairly significant implications for corporate governance. Also, as we argued in the previous section, to ignore the non-public acquisitions in a firm’s life is two throw away over four-fifths of the acquisitions done by a typical firm (and over half the value). In this section, we first present the evidence on public target announcements, and then examine those of non-public targets. Market Reactions to Public Target Acquisitions Table 4 summarizes the evidence on acquirer and target announcement effects from public target acquisitions, and in some cases, compares the evidence for the 1980s versus the 1990s. The data here are summarized from Tables 1 and 3 of Andrade, Mitchell and Stafford (2001), as well as the author’s own analysis.13 Acquirer and target announcement effects are similar for during the 1980s and the 1990s. During the 1980s, the acquirer market reaction to a public target announcement (measured by the Day [−1,+1] excess return) is −0.4%, while it is −0.32% during the 1990s (although the latter is statistically significant, it is not

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Table 4. Characteristics of Public Target Acquisitions: A Comparison of the 1980s and the 1990s. Characteristic

1980s

1990s

Percent acquisitions done with all Percent acquisitions done with all casha Percent done with any stocka Percent related acquisitionsa Bidders/Deala Bids/Deala Average premiuma

32.9% 45.3% 45.6% 40.1% 1.2 1.6 37.7%

57.8% 27.4% 70.9% 47.8% 1.0 1.2 34.5%

Announcement effects: (Day [−1, +1]) Acquirer Target Combined (Acquirer + Target) Acquirer: all stock Acquirer: all cash Related Unrelated Acquirer NYSE listed Acquirer NASDAQ listed

−0.40%a 16.00%a,* 2.60%a,* −1.50%a,* 0.40%a NA NA NA NA

−0.32%b,* 15.90b,* 1.40%b,* −1.05%b,* 1.44%b,* −0.56%* 0.22%b −0.46%b,* −0.21%b

NA NA NA NA NA

1.49%b,* 0.13%b −0.25%b −1.25%b,* −1.73%b,*

stocka

Smallest quintile relative size Next-to-smallest quintile relative size Middle quintile relative size Next-to-largest quintile relative size Largest quintile relative size a From

Tables 1, 3, and 4 of Andrade, Mitchell and Stafford (2001). on author’s analysis of 2305 public target acquisitions made by publicly listed U.S. acquirers from January 1990 to March 2000. ∗ Statistically significant. b Based

economically significant).14 For the target firm, it is 16.0 and 15.0% respectively, both statistically and economically significant. Combined returns are positive and significant, although it fell from 2.6% during the 1980s to 1.4% during the 1990s. The average premiums paid are similar: 37.7% during the 1980s, compared to 34.5% during the 1980s. Turning to the impact of medium of exchange (data only for the 1990s), we see that the acquirer announcement effects are negative and significant for all-stock transactions (−1.05%), while they are positive and significant for all-cash transactions (+1.44%). Announcement effects for related target acquisitions of public targets are not higher than those for unrelated acquisitions.


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And, acquisitions made by the larger, older-economy NYSE firms have a worse announcement effect than those made by higher-technology firms of NASDAQ. When we break down the announcement effects by the relative sizes of the target value to acquirer value (again data only for the 1990s), we observe a near-monotonic decrease in the announcement effect – the larger the relative size of the public target, the worse the market reaction on the acquirer’s stock price. For instance, the announcement effect for the smallest quintile of relative size is +1.49%, while it is −1.73% for the largest quintile. Market Reactions to Non-Public Target Acquisitions In the recent past, researchers have turned their attention to market value effects of acquisitions of non-public firms.15 Of course, with non-public targets, it is only possible to examine the market value effects for the acquiring firm. Table 5 summarizes the evidence on acquirer and target announcement effects for non-public target acquisitions. Given the relatively recent vintage of the research in this area, much of the data are for the 1990s. The results are dramatically different from those that the conventional wisdom based on public target acquisitions would suggest. First, acquirer announcement effects are large and positive for non-public target acquisitions, with the three-day excess return of +2.05% (it is also massively significant, with a t-statistic of over 24, which we do not report in the table). Second, the announcement effects for both stock- and cash-based acquisition announcements are positive and significant (+2.19 and +1.48%, respectively), with the returns to stock being higher. Third, both related (+2.11%) and unrelated (+1.98%) acquisition excess returns are positive and significant, as are the excess returns for NYSE acquirers (+1.13%) and NASDAQ acquirers (+2.67%; the NASDAQ returns are again significantly higher than those for NYSE acquirers). When we break down the announcement effects by the relative sizes of the target value to acquirer value, we observe a near-monotonic increase in the announcement effect – the larger the size of the non-public target, the better the market reaction on the acquirer’s stock price. For instance, the announcement effect for the smallest quintile of relative size is +1.81%, while it is +2.73% for the largest quintile. This is opposite to what we observe for public target acquisitions. Summarizing the evidence on announcement effects: Where data are available to compare, acquisition announcement effects as measured by stock price changes during the 1980s and the 1990s appear to be largely similar.

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Table 5. Characteristics of Non-Public Target Acquisitions: A Comparison of the 1980s and the 1990s.a Characteristic Percent acquisitions done with all stock Percent acquisitions done with all cash Percent related acquisitions Announcement effects: (Days [−1,+1]) Acquirer Acquirer: all stock Acquirer: all cash Related Unrelated Acquirer NYSE listed Acquirer NASDAQ listed Smallest quintile relative size Next-to-smallest quintile relative size Middle quintile relative size Next-to-largest quintile relative size Largest quintile relative size

1980s (%) NA 75.2b NA

1990s (%) 18.3 45.2 53.3

1.15b,* 2.64c,* 0.09c NA NA NA NA

2.05* 2.19* l.48* 2.11* 1.98* 1.13* 2.67*

NA NA NA NA NA

1.81* 1.68* 1.99* 2.05* 2.73*

a 1990s

data are based on author’s analysis of 10,139 non-public target acquisitions made by publicly listed U.S. acquirers from January 1990 to March 2000. b From Table 3 in Hansen and Lott (1996), whose data cover the period 1985–1990. The definitions of “all cash” are not strictly comparable. c From Table 2 in Chang (1998), whose data cover the period 1981–1992. The definitions of “all stock” and “all cash” are not strictly comparable. ∗ Statistically significant.

With public target acquisitions, target firm shareholders gain, while acquirers break even; the typical premium paid is a little over one-third of the target’s pre-bid price; stock-based acquisitions send negative signals while cash-based acquisitions send positive signals; related acquisitions do not elicit better announcement effects; older-economy acquirers seem to have worse announcement effects; market reactions are worse the larger is the size of the target relative to the size of the acquirer. With non-public target acquisitions, acquiring firms’ shareholders gain (although we cannot assess the premium paid in this case); both stock- and cash-based acquisitions elicit positive announcement effects, with stock doing better; both related and unrelated acquisitions elicit positive announcement effects, with related doing better; both high-technology and older-economy firms do well, although high-technology acquirers do better; market reactions are better the larger is the size of the target relative to the size of the acquirer.

We turn next to an examination of the corporate governance implications of the evidence that we have marshaled in this section and the previous one.


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CORPORATE GOVERNANCE IMPLICATIONS OF THE EMPIRICAL EVIDENCE Governance Implications of the Evidence on Announcement Effects The evidence examined thus far points to some straightforward guidelines for boards and top managements. Conventional wisdom has it that it is difficult to create value with M&A, and that acquirers should prepare to be disappointed.16 This conclusion is not surprising, given the fact that the typically quoted market reaction points to M&A being viewed by markets as a zero excess return, “you-get-what-you-pay-for” type of event, if we use the short-term impact on the acquirer stock price upon announcement as the guide. It is a fair guide to the extent that financial markets are reasonably efficient most of the time – the announcement effect is simply an unbiased forecast of what is subsequently expected to happen. We need to keep in mind that value-creation from M&A occurs only if the acquirer performs better than expected relative to the price paid: i.e. if the price (including the premium) initially paid is lower than the PV of the base-case value of the target plus the PV of the subsequently realized synergies. But this is not easy to make happen. If we assume a competitive market for corporate control (or that the target firm’s shareholders are effective at bargaining away the PV of the forecasted synergy gains up-front, e.g. through use of anti-takeover strategies), then the acquirer pays up-front for value that (s)he hopes to ultimately realize over the long run. Even if the acquirer performs as well as initially expected – in the sense of improving efficiencies to realize all the initially forecasted synergies – that only gets it to the break-even point! Value is created only if the acquirer performs better than expected, or is able to exploit major information asymmetries to acquire the target at a price below its fair value even when the market for corporate control is competitive. Both of those are difficult to do. Thus, it should perhaps come as no surprise that the typical acquirer fails to create value as measured by this standard.17 So why would a board that subscribes to the principle of shareholder value maximization accede to such a high likelihood of apparent value-destruction? Put differently, why do boards and top managements willingly spend trillions of dollars to implement strategies via M&A whereby, if they are lucky, they break even, and seemingly in a majority of the cases, they reduce their shareholders’ wealth? As Andrade, Mitchell and Stafford (2001, p. 118) point out, “. . . in an efficient economy, there would be a direct link between causes and effects, mergers would happen for the right reasons, and their effects would be, on average, as expected by the parties during negotiations.” The challenge, then,

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for boards, is to understand some of the “right” reasons and motivations for acquisitions. First, the conventional wisdom may somewhat overstate the case, since much of it is implicitly based on empirical evidence in relation to public target acquisitions, and even there, often those of the larger and higher-profile public targets. Second, the market does view the average non-public target acquisition as a positive-NPV event for the acquirer, regardless of size, relatedness, medium of exchange, and industry. Even in the case of public target acquisitions, those that are done with cash and are of relatively smaller targets elicit positive market reactions. In other words, there are categories of acquisition where the market gives the acquirer the benefit of doubt. Where the evidence on value-destruction is fairly unambiguous is when the public target is large, and stock is used as the medium of exchange. We can readily explain why smaller targets are more likely to create value (or at least, destroy less value) for the acquirer. It is easier to undertake due diligence, acquisitions are quicker to carry out, and post-acquisition integration is likely to be smoother and faster, with smaller targets. There are smaller managerial egos and power to battle, fewer entrenched managerial positions to displace (or duplicate), and smaller acquisitions are less likely to be driven by considerations such as hubris and empire-building motives on the part of the acquiring CEO. A large acquirer also brings to the table better bargaining and negotiating strengths, as well as more experienced lawyers and investment bankers. Moreover, it is less likely that information intermediaries such as analysts, media, and risk-arbitragers will become involved in the acquisition process of a small firm, and thus more likely that the acquirer can exploit mis-valuations arising from the information asymmetries vis-à-vis the market. Why should non-public target acquisitions, especially the larger and stockbased ones, create value for the acquirer? With non-public targets, there are a number of reasons why an acquirer can potentially come out ahead. One, private owners might be willing to cash out for a liquidity discount (Fuller, Netter & Stegemoller, 2002), and that accrues as a premium to the buyer. Two, even in a situation in which non-public targets are auctioned off, the seller may not recoup all the gains. Hansen (2001) points that in the auction market for companies, sellers seek to limit both the number of bidders and the amount of information that they reveal to buyers – despite the fact that a considerable auctions literature suggests that the reverse should be true for a seller that wants to extract the highest price – because of the potential costs of information revelation. Three, there may be a discount associated with information asymmetries between the buyer and the seller, in the spirit of the classic “lemons problem.” Four, with stock-based acquisitions of a large non-public target, the seller becomes a blockholder


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in the combined firm, and is perhaps able to more effectively monitor the buyer’s post-acquisition behavior (and the buyer’s incentive to gamble with their shareholders’ money). As to the opposite market value reaction to cash- versus stock-based acquisitions with public target acquisitions, the well-known argument for why stock as a medium of exchange creates a negative market reaction has to with signaling – The use of stock signals overvaluation of the acquirer’s stock, and the market corrects appropriately for such overvaluation. But if that is true, why does the market not read a similar signal when non-public target acquisitions, especially larger ones, are announced? As Chang (1998) argues, acquiring firms are more likely to reveal private information to a potential blockholder of the combined firm than they are to a group of dispersed shareholders. Thus, the willingness of private owners to hold a large block of shares conveys favorable information and hence a positive stock market reaction. All that said, is the implication that boards of acquirers should recommend against large, stock-based acquisitions of public targets? The recommendation here gets a bit murky. Shleifer and Vishny (2001) argued that acquirers can use their temporarily overvalued stock as a cheaper cost of capital source to buy a real asset when the going is good; they point out that, despite the (expected) initial negative reaction by the market, this may be quite a sensible strategy if the firm’s value will revert to its intrinsic value in the long run, i.e. if the acquirer’s stock price would have declined in the long run in any event as the market corrects its mistake. Thus, even in the case of large, stock-based public target acquisitions, “good” or “bad” depends on what we use as the benchmark. If we live in a world in which the benchmark available is not the best but the second-best, then the Shleifer-Vishny baseline of “what the acquirer’s stock price would have been in the long-run if they did nothing” is indeed a relevant one to validate the usefulness of an acquisition strategy.18

Corporate Governance Implications of the Aggregate Data In relation to macro-trends, we observed a four-fold rise in the role of M&A during the 1990s compared to the 1980s, both in the U.S. and abroad (and in relative terms, even more so abroad). This might seem to imply that the market for corporate control, its role as a source of governance discipline, and its role as an effective complement to the discipline from both internal and other external sources were alive and well. This, despite the fact that both leverage and hostility all but disappeared during the 1990s, to be replaced by stock and amicability. Holmstrom and Kaplan (2001, p. 124) argue as much, when they conclude:

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Managers initially fought takeovers with legal maneuvers and by enlisting political and popular support. They were successful in that hostile takeovers became more costly in the 1990s. But by that time, managers, boards, and institutional shareholders had seen what LBOs and other market driven restructurings could do. Thanks to lucrative stock option plans, managers could share in the market returns from restructured companies. Shareholder value became an ally rather than an enemy. This explains why restructurings continued at a high rate in the 1990s, but for the most part on amicable terms. There was less of a need for high leverage as deals could be paid for with stock with less worry that managers would abuse this privilege.

The obvious interpretation is that, compared to the previous decade, internal governance mechanisms had become so prevalent and substantive during the 1990s that the threat of a hostile takeover or of being purchased with cash (backed by debt) rather than stock was less necessary to make incumbent managements behave. But the corporate governance crisis and the market collapse of the early 2000s would suggest that it was perhaps too sanguine a conclusion to draw. The other external mechanisms had also failed to some extent, and it is not at all clear that internal governance mechanisms stepped in to fill the void. The financial markets of the 1990s did not turn out to be the source of discipline that was hoped for. Investor decisions were based (as it turned out) on poor or corrupted information fed by conflict-laden analysts, questionable accounting practices, poorly-informed media, and the myth of a recession- and inflation-free, technology-driven “new-economy.” By hindsight, it would seem that in the 1990s (especially the second half), markets ended up providing capital at lower cost than required, in relation to true cash flow prospects. There is, as yet, no clear evidence on the disciplining role of managerial labor markets or internal governance mechanisms, but anecdotally, it seems that those too may have failed to play an adequate role. It would appear that the myth got created during the 1990s that top management talent had become rare. Boards were willing to provide extremely largely sums to attract and retain senior managers.19 Compensation contracts seemed to precede performance, rather than the reverse. Boards of many leading companies (and even governance standards-setting institutions such as the New York Stock Exchange) were ineffective, seemingly lacking the ability, interest, or competence to challenge CEOs. The hoped for pay-for-performance effects of stock options turned out to be small or even nonexistent. Option contracts seemed to become a one-way bet at the shareholders’ expense, or essentially a form of rent-extraction from the shareholders (see, e.g. Bebchuk, Fried & Walker, 2002). Preceding this mix was the introduction of many so-called “alternative constituency” statutes by state legislatures during the late 1980s and the early 1990s and the articulation of the “just-say-no” defense by the Delaware courts,20


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which, some argued, made shareholder value-enhancing tender offers difficult and time-consuming to carry out. Although it is clear that neither set of regulatory developments had a significant impact on the overall pace of acquisition activity, this confluence of events is certainly consistent with the disappearance of the hostile takeover in the U.S. during the 1990s. At the extreme, it seems plausible that, when all the data are fully in and the events analyzed through the lens of some history, we may just as well conclude that the stock and the amicability of the 1990s takeover markets simply reflected the fact that the market for corporate control had lost its teeth, and, in an unintended way, helped hasten the governance crisis. Indeed, the plea reflected in the title of a 2002 Op-Ed article by Henry Manne in the Wall Street Journal – the same Manne who, nearly forty years prior, coined the phrase “market for corporate control” – says it well: “Bring Back the Hostile Takeover.”21

Corporate Governance and Target Company Boards The preponderance of market-related evidence in the case of public targets is that their shareholders walk away with most, if not all of the takeover gains. Thus, it would seem that the average public target board is effective in extracting up-front much of the PV of expected future synergies from the acquirer via the premium that (s)he is made to pay. Indeed, the evidence from announcement effects would suggest that large public targets, and those that are the object of stock-based takeovers may be extracting up-front even more than the full value of the PV of acquirer’s expected future synergies; i.e. they seem to be making the acquirer overpay. Yet, considerable controversies surround the use takeover defenses by targets, the role change-of-control compensation contracts such as golden parachute awards, and the role of state-level alternative constituency statutes that seek to protect various classes of non-shareowning stakeholders in the event of a hostile takeover. While a detailed examination of these issues is beyond the scope of this Chapter, we briefly address them by summarizing the broad evidence. Comment and Schwert (1995) provide convincing evidence that poison pill rights issues, control share laws, and business combination laws have not systematically deterred takeovers and are unlikely to have caused the demise of the 1980s market for corporate control. They show that poison pills and control share laws are associated with higher takeover premiums for selling shareholders, both unconditionally and conditional on a successful takeover, and argue that, if anything, antitakeover measures increase the bargaining position of target

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firms, but they do not prevent many transactions. In a detailed and carefully done empirical analysis that attempts to correct for many possible econometric biases in previous research on takeover defenses, Bhagat and Jeffreis (2002) conclude antitakeover measures are not effective in preventing takeovers or in enhancing management’s job tenure – in other words, they do not do a good job of insulating managers from the consequences of poor performance or ineffective governance. With regard to change-of-control severance packages, Narayanan and Sundaram (1998) show that golden parachute awards have no impact on firm performance, nor on the likelihood of a firm being taken over.22 Similarly, despite Manne’s conjecture (see Note 21) that target managers’ stock-based compensation contracts may have led them to expropriate value from their shareholders, there is, as yet, no empirical evidence to back up that assertion – it is a wide open issue for further research. Some have suggested that the stakeholder statutes enacted by states have been used by directors as takeover shields. By the early 1990s, thirty states in the U.S. had enacted such statutes (also called “constituency statutes”; McDaniel, 1991) that allowed directors to consider the interests of non-shareholder constituencies in corporate decisions. But the net effect of these statutes were marginal. Studies concluded that they did little to alter the centrality of shareholder primacy in U.S. corporate law (Singer, 1993; Springer, 1999). On the surface, therefore, the sum total of the empirical evidence on the effectiveness of antitakeover defenses and stakeholder statutes would suggest that boards of public targets are perhaps doing a reasonable job of value-capture, in the sense of attempting to maximize their shareholders’ value in takeover situations.23 There is certainly no empirical evidence that can point to target boards systematically doing the reverse.

CONCLUDING REMARKS The phenomenon of M&A is here to stay. Despite the lull in activity in the early 2000s – which probably just reflects the general slowdown in investment spending accompanying a worldwide recession – there is little doubt that it will continue to be a major vehicle for strategy implementation for global corporations. The most widely accepted item of conventional wisdom with regard to M&A has it that acquirers’ boards should prepare to be disappointed, and that value creation is extremely difficult. However, as we saw above, that wisdom pertains only to a relatively small slice (albeit, larger as a proportion of the total value) of the overall M&A activity, those that involve large, stock-based acquisitions of public targets. A strategy of growth through non-public targets or of public


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target acquisitions using cash is not viewed as acquirer value-neutral (let alone value-reducing) by the financial markets. Quite the opposite. Even in the case of large, stock-based public target acquisitions, the “disappointment” that the acquirer should prepare for is relative: If it turns out that such acquisitions are likely to be less disappointing than the alternative, that may not be such a bad thing. As to value creation being a difficult thing to achieve, one might argue that is true for any source of value, not just acquisitions. As to the effectiveness of target boards, the evidence would seem to suggest that they are, at least on the surface, doing an adequate job of taking care of their shareholders’ interests. However, the disappearance of hostility, leverage, and cash during the 1990s does create cause for concern. If corporate combinations are the outcome of no more than friendly deals with emphasis on risk-sharing between the acquirer and the target through the use of stock swaps, the market for corporate control could cease to be the disciplining mechanism that it once was. In a situation in which the other mechanisms of governance are either ineffective or have become co-opted, the weakening of this important external force for improved governance would be an extremely unwelcome development for the economy.

NOTES 1. Marris (1964) is also sometimes credited with independently having coined this phrase. 2. For an excellent summary of the U.S. evidence from a managerial perspective, see Bruner (2001); for a summary of the strategic management literature see Datta, Pinches and Narayanan (1992); for the non-U.S. and cross-border evidence, see Denis and McConnell (2003). 3. However, as we will see, the market share of U.S. firms in M&A transactions dropped sharply during the 1990s relative to the 1980s despite the fact their volume increased three-fold, suggesting that it became a phenomenon of worldwide scope. In other words, while the market for corporate control became a fairly mature phenomenon in the U.S. during the decade of the 1980s, it took another decade for it to catch on in the rest of the world. 4. The best example of this perspective is Jensen and Meckling (1976), which, building on the earlier works of Coase (1937), and Alchian and Demsetz (1972), argues that incentives of corporate managers to maximize shareholder value is proportional to the fraction of the firm’s shares they hold in their personal portfolios. This view of the governance problem, one that focuses on just the relation between the firm and its capital providers has become so dominant in the literature that it is almost automatically accepted. For example, in a comprehensive summary of the corporate governance literature in finance, Shleifer and Vishny (1997, p. 738) define corporate governance as the process “that deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment,” and readily admit that their “. . . perspective on corporate governance is a straightforward agency perspective, sometimes referred to as the separation of ownership

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and control.” See Bradley, Schipani, Sundaram and Walsh (1999) for a more detailed discussion of these issues. 5. Subsequent empirical work (e.g. Berkovitch & Narayanan, 1993; Hayward & Hambrick, 1997) found support for Roll’s hubris hypothesis. 6. Thus, the average target was purchased for $132 million. 7. This conclusion is strengthened by the fact that acquisitions of foreign companies by U.S. acquirers rose from 1.6 to 5.2% of all transactions from the 1980s to the 1990s, while acquisitions of U.S. companies by foreign acquirers fell from 10.9% of all transactions to 4.9%. This also suggests that M&A activity had begun to move substantially outside the geographic boundaries of the U.S. 8. This has changed in the recent past, as some researchers have begun to focus more attention on non-public targets: see, for example, Hansen and Lott (1996), Chang (1998), and Fuller, Netter and Stegemoller (2002). We will address them in greater detail in the next session. 9. A vast majority (nearly 95% as recorded by the SDC database) of non-public target acquisitions involve just two categories, those that are privately held (i.e. typically owner-managed or controlled) and those that involve sales of subsidiaries or divisions of larger firms. 10. Even if we were to focus on the total value rather than number, non-public targets represent about half, a sizeable proportion. 11. The definition of what constitutes “hostile” is prone to considerable subjectivity, and measurements vary depending on the definition and the data source used. Some scholars believe that this is not a particularly meaningful distinction, since it is in the “eyes of the beholder” and many so-called hostile deals share the characteristics of friendly deals (see Schwert, 2000, who also examines the measurement differences that arise when different data sources are used). Interestingly, many M&A practitioners often say the opposite: That there is no such thing as a “friendly” acquisition and that all acquisitions are characterized by varying degrees of unfriendliness! In any event, data on hostility are not as useful for precise measurements as they are for examining trends over time – i.e. for any given definition, we can compare two different eras to make sensible judgments about the relative importance of that particular definition of the phenomenon. 12. Using a different definition of hostility (and different data source), Andrade, Mitchell and Stafford (2001) report 14% of public target acquisitions were hostile during the 1980s and 4% during the 1990s, showing a trend (and relative proportions) similar to that from the SDC data we report here. 13. The author’s results are based on an analysis of approximately 2,300 public target and 10,200 non-public target acquisitions undertaken by publicly listed U.S. firms during the 1990s, and is ongoing research at the time of writing. 14. This is consistent with the −0.37% acquirer excess return documented by Mulherin and Boone (2000) for the period 1990–1999. 15. Hansen and Lott (1996) were the first to examine non-public target acquisitions, followed by Chang (1998) – both studies, however, suffer from small sample sizes. Fuller, Netter and Stegemoller (2002) examined non-public target acquisitions in detail, however, their acquirer sample was restricted to acquiring firms undertaking four or more acquisitions. 16. See, e.g. Sirower (1997) and Bruner (2001). 17. All of this evidence would also seem to be bolstered by studies on the long-run stock market performance of acquiring firms, many of which suggest that acquiring firms,


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especially those that use stock or acquire “glamour” (as opposed to “value”) targets underperform their benchmarks (see, e.g. Loughran & Vijh, 1997; Rau & Vermaelen, 1998). However, the evidence from these studies may be of somewhat limited practical value as they have been critiqued as being fraught with statistical problems that raise questions regarding their power to sort the “good” from the “bad” (see, e.g. the critiques in Barber & Lyon, 1997; Welch & Ritter, 2002). 18. Recalling the well-known example (and one that is now commonly commented upon as being a failure), that of AOL’s acquisition of Time Warner, the Shleifer-Vishny argument would suggest that AOL’s board probably did the right thing by their shareholders. Consider that, although the acquisition, in all likelihood, destroyed AOL shareholder value in the longer run, that value destruction may have been smaller than what might have resulted if AOL had done nothing, but instead, allowed its stock price to be treated as just another dotcom play when the bubble burst! 19. Krugman (2002) reports that in 1999, the average annual real compensation of the Fortune 100 CEOs ($37.5 million) was over 1,000 times the pay of ordinary workers. 20. Prior to the 1980s, boards relied on the business judgment rule. The business judgment rule gave wide leeway to directors to respond to a tender offer without fear of personal liability. Delaware courts found this to be an inherent conflict between the directors and shareholders, and applied a higher standard of scrutiny to the actions of directors, resulting in the ruling that, when boards determine that a change of control is inevitable, their duty is to agree to the highest price possible for shareholders (the “Revlon” standard). The law in Delaware then further developed to allow the board the discretion to “just say no” to a cash tender offer. Many other states have since adopted a similar rule. 21. Manne (2002, p. A18) also implies that the extensive use of stock and friendliness in takeovers had essentially become a form of side-payment to incumbents at the expense of shareholders: “The compensation paid to managers for such a change [of control] may take the form of a lucrative consulting arrangement, stock or stock options in the acquiring company, a generous severance package, or some other bonus. But the salient fact in each of these situations is that the managers and not the shareholders receive the premium being paid for control.” 22. Bebchuk, Coates and Subramanian (2002) argue that staggered boards do act as an effective takeover deterrent. But weighed against the rest of the empirical evidence on the ineffectiveness of antitakeover defenses (and given the relatively small sample size in their analysis), it appears hard to escape the conclusion that takeover defenses are placebo rather than poison. 23. This raises a larger puzzle. Many of the targets were once acquirers themselves. The question that arises is, why are firms effective capturing returns to their shareholders as targets, but not so effective in their role as acquirers?

ACKNOWLEDGMENTS The author is grateful to the Thunderbird Research Center for support, and to Andrew Inkpen for comments.

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Manne, H. (1965). Mergers and the market for corporate control. Journal of Political Economy, 73, 110–120. Manne, H. (2002). Bring back the hostile takeover. The Wall Street Journal (June 26), A18. Marris, R. (1964). The economic theory of managerial capitalism. London: Macmillan. McDaniel, M. W. (1991). Stockholders and stakeholders. Stetson Law Review, 21, 121–162. Mulherin, H., & Boone, A. (2000). Comparing acquisitions and divestitures. Journal of Corporate Finance, 6, 117–139. Narayanan, M., & Sundaram, A. (1998). Golden parachutes and corporate behavior: A safe landing? University of Michigan Business School Working Paper. Rau, R., & Vermaelen, T. (1998). Glamour, value, and the post-acquisition performance of acquiring firms. Journal of Financial Economics, 55, 223–253. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59, 197–216. Schwert, W. (2000). Hostility in takeovers: In the eyes of the beholder? Journal of Finance, 55, 2599–2640. Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783. Shleifer, A., & Vishny, R. (2001). Stock market-driven acquisitions. NBER Working Paper No. 8439 (August). Singer, J. W. (1993). Jobs and justice: Rethinking the stakeholder debate. University of Toronto Law Journal, 43, 475–505. Sirower, M. (1997). The synergy trap: How companies lose the acquisition game. New York: Free Press. Springer, J. D. (1999). Corporate law and constituency statutes: Hollow hopes and false fears. New York University Annual Survey of American Law, 85–123. Sundaram, A., Bradley, M., Schipani, C., & Walsh, J. (2000). Comparative corporate governance and global corporate strategy. In: R. Grosse (Ed.), Thunderbird on Global Strategy. New York: Wiley. Welch, I., & Ritter, J. (2002). A review of IPO activity, pricing, and allocations. Yale International Center for Finance Working Paper #02-01 (February).

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